<PAGE>
<PAGE>
PROSPECTUS
May 1, 1999
T. Rowe Price Balanced Fund
A fund seeking capital growth and current income from stocks and bonds.
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this prospectus. Any representation
to the contrary is a criminal offense.
T. ROWE PRICE RAM LOGO
<PAGE>
T. Rowe Price Balanced Fund, Inc.
Prospectus
May 1, 1999
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1 ABOUT THE FUND
Fund, Market, and Risk Characteristics 1
---------------------------------------------
Other Information About the Fund 4
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2 ABOUT YOUR ACCOUNT
Pricing Shares and Receiving 7
Sale Proceeds
---------------------------------------------
Distributions and Taxes 8
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Transaction Procedures and 10
Special Requirements
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3 MORE ABOUT THE FUND
Organization and Management 13
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Understanding Performance Information 15
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Investment Policies and Practices 15
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Financial Highlights 24
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4 INVESTING WITH T. ROWE PRICE
Account Requirements 25
and Transaction Information
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Opening a New Account 25
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Purchasing Additional Shares 27
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Exchanging and Redeeming 27
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Rights Reserved by the Fund 29
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Information About Your Services 30
---------------------------------------------
T. Rowe Price Brokerage 32
---------------------------------------------
Investment Information 33
---------------------------------------------
</TABLE>
Founded in 1937 by the late Thomas Rowe Price, Jr., T. Rowe Price Associates,
Inc., and its affiliates managed $147.8 billion for more than seven million
individual and institutional investor accounts as of December 31, 1998.
Mutual fund shares are not deposits or obligations of, or guaranteed by, any
depository institution. Shares are not insured by the FDIC, Federal Reserve, or
any other government agency, and are subject to investment risks, including
possible loss of the principal amount invested.
<PAGE>
ABOUT THE FUND
1
FUND, MARKET, AND RISK CHARACTERISTICS: WHAT TO EXPECT
----------------------------------------------------------
To help you decide whether this fund is appropriate for you, this section
reviews its investment objective, strategy, and risks.
What is the fund's objective?
The fund seeks to provide capital growth, current income, and preservation of
capital through a portfolio of stocks and fixed income securities.
What is the fund's principal investment strategy?
The fund normally invests approximately 60% of total assets in common stocks
and 40% in fixed income securities. We will invest at least 25% of total
assets in senior fixed income securities.
When deciding upon allocations within these prescribed limits, the manager
may favor fixed income securities if the economy is expected to slow
sufficiently to hurt corporate profit growth. The opposite may be true when
strong economic growth is expected. And when selecting particular stocks to
purchase, the manager will examine relative values and prospects among
growth- and value-oriented stocks, domestic and international stocks, and
small-cap and large-cap stocks. This process draws heavily upon T. Rowe
Price's proprietary stock research expertise. While the fund maintains a
well-diversified portfolio, the manager may at a particular time shade stock
selection toward markets or market sectors that appear to offer attractive
value and appreciation potential. Much the same security selection process
applies to bonds. For example, when deciding on whether to adjust allocations
to high-yield (junk) bonds, the manager will weigh such factors as the
outlook for the economy and corporate earnings and the yield advantage
lower-rated bonds offer over investment-grade bonds.
We may also invest in other securities, including futures and options, in
keeping with the fund's objective.
Securities may be sold for a variety of reasons, such as to effect a change
in asset allocation, secure a gain, limit a loss, or redeploy assets into
more promising opportunities.
. For details about the fund's investment program, please see the Investment
Policies and Practices section.
What are the main risks of investing in the fund?
The risks vary depending on the fund's mix of stocks, bonds, and money market
securities. The greater the percent of stocks, the greater the risk.
<PAGE>
T. ROWE PRICE
. Risks of stock investing Stock prices can fall because of weakness in the
broad market, a particular industry, or specific holdings. The market as a
whole can decline for many reasons, including adverse political or economic
developments here or abroad, changes in investor psychology, or heavy
institutional selling. The prospects for an industry or company may
deteriorate because of a variety of factors, including disappointing earnings
or changes in the competitive environment. In addition, our assessment of
companies held in the fund may prove incorrect, resulting in losses or poor
performance even in a rising market. Finally, the fund's investment approach
could fall out of favor with the investing public, resulting in lagging
performance versus other types of stock funds.
. Equity investors should have a long-term investment horizon and be willing
to wait out bear markets.
. Risks of bond investing Bonds are debt securities, meaning the issuer has a
contractual obligation to pay interest at a fixed rate on specified dates and
to repay the principal (face value) upon maturity. Bonds in the fund have two
main sources of risk. Interest rate risk, the most important risk, is the
decline in bond prices that usually accompanies a rise in interest rates.
Longer-maturity bonds typically suffer greater declines than those with
shorter maturities. Credit risk is the chance that any fund holding could
have its credit downgraded, or that a bond issuer will default (fail to make
timely payments of interest or principal), potentially reducing the fund's
income level and share price.
While the fund expects to invest primarily in investment-grade bonds, it may
also hold high-yield (junk) bonds, including those with the lowest rating.
Investment-grade bonds are those rated from the highest (AAA) to medium (BBB)
quality, and high-yield bonds are rated BB and lower. The latter are
speculative since their issuers are more vulnerable to financial setbacks and
recession than more creditworthy companies, but BBB-rated bonds may have
speculative elements as well. High-yield bond issuers include small companies
lacking the history or capital to merit investment-grade status, former blue
chip companies downgraded because of financial problems, and firms with heavy
debt loads.
. Risks of foreign securities To the extent the fund invests in foreign
stocks and bonds, it is also subject to the special risks associated with
such investments whether denominated in U.S. dollars or foreign currencies.
These risks include potentially adverse political and economic developments
overseas, greater volatility, less liquidity, and the possibility that
foreign currencies will decline against the dollar, lowering the value of
securities denominated in those currencies. Currency risk affects the fund to
the extent that it holds nondollar foreign bonds.
. Derivatives risk To the extent the fund uses futures and options, it is
exposed to additional volatility and potential losses.
<PAGE>
ABOUT THE FUND
As with any mutual fund, there can be no guarantee the fund will achieve its
objective.
. The fund's share price may decline, so when you sell your shares, you may
lose money.
How can I tell if the fund is appropriate for me?
Consider your investment goals, your time horizon for achieving them, and
your tolerance for the risk. Generally, the fund is intended for those
seeking a middle-of-the-road approach that emphasizes stocks for their higher
capital appreciation potential but retains a significant income component to
temper principal volatility.
If you are investing for principal safety and liquidity, you should consider
a money market fund.
The fund can be used in both regular and tax-deferred accounts, such as IRAs.
How has the fund performed in the past?
The bar chart and the average annual total return table indicate risk by
illustrating how much returns can differ from one year to the next.The fund's
past performance is no guarantee of its future returns.
The fund can also experience short-term performance swings, as shown by the
best and worst calendar quarter returns accompanying the following chart. The
returns are only for the years depicted in the chart.
<TABLE>
INSERT BAR
CHART HERE
<CAPTION>
Calendar Year Total Returns
-------------------------------
<S> <C>
1989 20.65%
1990 7.21
1991 21.98
1992 7.71
1993 13.35
1994 -2.05
1995 24.88
1996 14.57
1997 18.97
1998 15.97
-------------------------------
</TABLE>
Quarter ended Total return
Best quarter 12/31/1998 12.22%
Worst quarter 9/30/1998 -6.51%
<PAGE>
T. ROWE PRICE
<TABLE>
Table 1 Average Annual Total Returns
<CAPTION>
Periods ended December 31, 1998
------------------------------------- 1 year 5 years 10 years/a/
<S> <C> <C> <C> <S>
Balanced Fund 15.97% 14.09% 14.05%
------------------------------------
Merrill Lynch/Wilshire Capital
Markets Index 18.45 15.95 14.48
Combined Index Portfolio 20.98 17.32 15.34
(60% Stocks and 40% Bonds)/b/
------------------------------------------------------------------------------
</TABLE>
These figures include changes in principal value, reinvested dividends, and
capital gain distributions, if any.
/a/
Performance prior to September 1, 1992, reflects managers other than T. Rowe
Price.
/b/
The securities indexes used as comparisons for the stock and bond portions of
the fund are the S&P 500 and Lehman Aggregate Index, respectively.
What fees or expenses will I pay?
The fund is 100% no load. There are no fees or charges to buy or sell fund
shares, reinvest dividends, or exchange into other T. Rowe Price funds. There
are no 12b-1 fees.
<TABLE>
Table 2 Fees and Expenses of the Fund
<CAPTION>
Annual fund operating expenses
(expenses that are deducted from fund assets)
------------------------------------------------------------------------------
<S> <C>
Management fee 0.47%
Other expenses 0.31%
Total annual fund operating 0.78%
expenses
------------------------------------------------------------------------------
</TABLE>
Example. The following table gives you a rough idea of how expense ratios
may translate into dollars and helps you to compare the cost of investing in
this fund with that of other funds. Although your actual costs may be higher
or lower, the table shows how much you would pay if operating expenses remain
the same, you invest $10,000, you earn a 5% annual return, and you hold the
investment for the following periods:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1 year 3 years 5 years 10 years
$80 $249 $433 $966
----------------------------------------------------
</TABLE>
OTHER INFORMATION ABOUT THE FUND
----------------------------------------------------------
What are some of the fund's potential rewards?
The fund offers a way to balance the potential capital appreciation of common
stocks with the income and relative stability of bonds over the long term. It
<PAGE>
ABOUT THE FUND
should be less volatile than an all-stock fund. The fund's broad
diversification means that you are not putting all your eggs in one basket.
While there is no guarantee, spreading investments across several types of
assets could reduce the fund's overall volatility. Since prices of stocks and
bonds may respond differently to changes in economic conditions and interest
rate levels, a rise in bond prices, for example, could help offset a fall in
stock prices. Money market securities have a stabilizing influence, since
their price fluctuations are very small. In addition, the steady income
provided by bonds and money market securities contributes positively to total
return, cushioning the impact of any price declines or enhancing price
increases.
How does the portfolio manager try to reduce risk?
Consistent with the fund's objective, the portfolio manager uses various
tools to try to reduce risk and increase total return, including:
. Diversification of assets to reduce the impact of a single holding on the
fund's net asset value.
. Thorough research of stocks, bonds, and other securities by our analysts to
find the most favorable investment opportunities.
. Gradual shifts in stock, bond, and money market allocations to take
advantage of market opportunities and changing economic conditions.
. We regularly review the asset allocation and may make gradual changes,
within allowed ranges, based on our outlook for the economy, interest rates,
and financial markets. The fund will not attempt to time short-term market
swings.
Why include foreign securities?
The fund may invest up to 25% of its total assets in foreign stocks and
bonds, which offer advantages but also increase risk. The potential
advantages are extra diversification and enhanced returns. Since foreign
stock and bond markets may move independently from U.S. securities, they
could reduce the fund's short-term price fluctuations while offering a way to
participate in markets that may generate attractive returns. However, if U.S.
and foreign markets move in the same direction, the positive or negative
effect on the fund's share price could be magnified.
. For a discussion of the effects of currency exchange rate fluctuations and
other special risks of foreign investing, please see Investment Policies and
Practices.
How is a bond's price affected by changes in interest rates?
When interest rates rise, a bond's price usually falls, and vice versa. In
general, the longer a bond's maturity, the greater the price increase or
decrease in response to a given change in rates, as shown in Table 3.
<PAGE>
T. ROWE PRICE
<TABLE>
Table 3 How Interest Rates May Affect Bond Prices
<CAPTION>
Price per $1,000 of bond face value if interest rates:
Bond maturity Coupon Increase Decrease
1 point 2 points 1 point 2
poi
<S> <C> <C> <C> <C> <
1 year 4.54% $990 $981 $1,010 $1,
5 years 4.54 957 916 1,045 1,
10 years 4.66 924 856 1,083 1,
30 years 5.10 863 753 1,172 1,
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The table reflects yields on Treasury securities as of December 31, 1998. The
table may not be as representative of price changes for other types of bonds,
including mortgage-backed securities, because of prepayments. This is an
illustration and does not represent expected yields or share price changes of
any T. Rowe Price fund.
Is there other information I can review before making a decision?
Investment Policies and Practices in Section 3 discusses various types of
portfolio securities the fund may purchase as well as types of investment
management practices the fund may use.
<PAGE>
ABOUT YOUR ACCOUNT
2
PRICING SHARES AND RECEIVING SALE PROCEEDS
----------------------------------------------------------
Here are some procedures you should know when investing in a T. Rowe Price
fund.
How and when shares are priced
The share price (also called "net asset value" or NAV per share) for a fund
is calculated at the close of the New York Stock Exchange, normally 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. Current market values are used to price fund shares.
. 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.
Fund shares may be purchased through various third-party intermediaries
including banks, brokers, and investment advisers. Where authorized by a
fund, orders will be priced at the NAV next computed after receipt by the
intermediary. Consult your intermediary to determine when your orders will be
priced. The intermediary may charge a fee for its services.
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
. 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
<PAGE>
T. ROWE PRICE
financial institution account. The ACH system is supported by over 20,000
banks, savings banks, and credit unions. 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 seven calendar days
after we receive your redemption request.
. If for some reason we cannot accept your request to sell shares, we will
contact you.
USEFUL INFORMATION ON DISTRIBUTIONS AND TAXES
----------------------------------------------------------
. 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. No interest will accrue on amounts represented by
uncashed distribution or redemption checks.
Income dividends
. The fund declares and pays dividends (if any) quarterly.
. A portion of the fund's dividends may 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 a 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.
<PAGE>
ABOUT YOUR ACCOUNT
Tax Information
. 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 most new accounts or those opened by
exchange in 1984 or later, we will provide the gain or loss on the shares you
sold during the year, based on the "average cost," single category 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 not subject to current tax.
In January, you will be sent Form 1099-DIV indicating the tax status of any
dividend and capital gain distributions made to you. This information will
also be reported to the IRS. Distributions are generally taxable to you for
the year in which they were paid. You will be sent any additional information
you need to determine your taxes on fund distributions, such as the portion
of your dividends, if any, that may be exempt from state income taxes.
The tax treatment of a capital gain distribution is determined by how long
the fund held the portfolio securities, not how long you held shares in the
fund. Short-term (one year or less) capital gain distributions are taxable at
the same rate as ordinary income and long-term gains on securities held more
than 12 months are taxed at a maximum rate of 20%. If you realized a loss on
the sale or exchange of fund shares that you held six months or less, your
short-term loss will be reclassified to a long-term loss to the extent of any
long-term capital gain distribution received during the period you held the
shares.
<PAGE>
T. ROWE PRICE
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 a fund's ordinary income dividend. Net foreign currency losses
may cause a fund's dividend to be classified as a return of capital.
. 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 a portion of the money you just invested in the form of a taxable
distribution. Therefore, you may wish to find out a fund's record date before
investing. Of course, a fund's share price may, at any time, reflect
undistributed capital gains or income and unrealized appreciation, which may
result in future taxable distributions.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
----------------------------------------------------------
. Following these procedures helps assure timely and accurate transactions.
Purchase Conditions
Nonpayment
If your payment is not received or you pay with a check or ACH transfer that
does not clear, your purchase will be 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. The fund does not accept purchases made by credit card check.
Sale (Redemption) Conditions
Holds on immediate redemptions: 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.)
<PAGE>
ABOUT YOUR ACCOUNT
Telephone, Tele*Access/(R)/, and personal computer transactions
Exchange and redemption services through telephone and Tele*Access are
established automatically when you sign the New Account Form unless you check
the boxes that state you do not want these services. Personal computer
transactions must be authorized separately. T. Rowe Price funds and their
agents use reasonable procedures (including shareholder identity
verification) to confirm that instructions given by telephone or computer are
genuine; they are not liable for acting on these instructions. If these
procedures are not followed, it is the opinion of certain regulatory agencies
that the funds and their agents may be liable for any losses that may result
from acting on the instructions. A confirmation is sent promptly after a
transaction. All telephone 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 fund net assets, the
fund has the right to pay the difference between the redemption amount and
the lesser of the two previously mentioned figures with securities from the
fund.
Excessive Trading
. T. Rowe Price may bar excessive traders from purchasing shares.
Frequent trades, involving either substantial fund assets or a substantial
portion of your account or accounts controlled by you, can disrupt management
of the fund and raise its expenses. To deter such activity, the fund has
adopted an excessive trading policy. If you violate our excessive trading
policy, you may be barred indefinitely and without further notice from
further purchases of T. Rowe Price funds.
. Trades placed directly with T. Rowe Price If you trade directly with T.
Rowe Price, you can make one purchase and sale involving the same fund within
any 120-day period. For example, if 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
this limit, you are in violation of our excessive trading policy.
Two types of transactions are exempt from this policy: 1) trades solely in
money market funds (exchanges between a money fund and a nonmoney fund are
not exempt); and 2) systematic purchases or redemptions (see Information
About Your Services).
. Trades placed through intermediaries If you purchase fund shares through an
intermediary including a broker, bank, investment adviser, or other third
party and hold them for less than 60 calendar days, you are in violation of
our excessive trading policy.
<PAGE>
T. ROWE PRICE
Keeping Your Account Open
Due to the relatively high cost to a 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.
Small Account Fee
Because of the disproportionately high costs of servicing accounts with low
balances, a $10 fee, paid to T. Rowe Price Services, the fund's transfer
agent, will automatically be deducted from nonretirement accounts with
balances falling below a minimum level. The valuation of accounts and the
deduction are expected to take place during the last five business days of
September. The fee will be deducted from accounts with balances below $2,000,
except for UGMA/ UTMA accounts, for which the limit is $500. The fee will be
waived for any investor whose T. Rowe Price mutual fund investments total
$25,000 or more. Accounts employing automatic investing (e.g., payroll
deduction, automatic purchase from a bank account, etc.) are also exempt from
the charge. The fee will not apply to IRAs and other retirement plan
accounts. (A separate custodial fee may apply to IRAs and other retirement
plan accounts.)
Signature Guarantees
. 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.
<PAGE>
MORE ABOUT THE FUND
3
ORGANIZATION AND MANAGEMENT
----------------------------------------------------------
How is the fund organized?
The fund was incorporated in Maryland in 1991 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. On August
31, 1992, the fund acquired substantially all of the assets of Axe-Houghton
Fund B pursuant to an Agreement and Plan of Reorganization. As a result of
that transaction, the fund succeeded to the performance record of
Axe-Houghton Fund B. The performance record of the fund prior to September 1,
1992, is the result of investment managers other than T. Rowe Price.
. Shareholders benefit from T. Rowe Price's 62 years of investment management
experience.
What is meant by "shares"?
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
certificates are not issued.
Each share and fractional share entitles the shareholder to:
. Receive a proportional interest in a fund's income and capital gain
distributions.
. 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 fund's management contract.
Do T. Rowe Price funds have annual shareholder meetings?
The fund is not required to hold annual meetings and, to avoid unnecessary
costs to fund shareholders, does not intend to do so except when certain
matters, such as a change in its fundamental policies, must 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
instructions on voting by mail or telephone, or on the Internet.
<PAGE>
T. ROWE PRICE
Who runs the fund?
General Oversight
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
majority of Board members are independent of T. Rowe Price Associates, Inc.
(T. Rowe Price).
. 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 with the following members:
Richard T. Whitney, Chairman, Stephen W. Boesel, Raymond A. Mills, Edmund M.
Notzon, and Mark J. Vaselkiv. 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 1994. Mr. Whitney joined T. Rowe Price
in 1985 and has been managing investments since 1986.
The Management Fee
This fee has two parts - an "individual fund fee," which reflects a fund's
particular characteristics, and a "group fee." The group fee, which is
designed to reflect the benefits of the shared resources of the T. Rowe Price
investment management complex, is calculated daily based on the combined net
assets of all T. Rowe Price funds (except the Spectrum Funds, and any
institutional, index, or private label mutual funds). The group fee schedule
(shown below) is graduated, declining as the asset total rises, so
shareholders benefit from the overall growth in mutual fund assets.
<TABLE>
Group Fee Schedule
<CAPTION>
<S> <C> <C> <C>
0.334% First $50 billion/a/
-----------------------------------------
0.305% Next $30 billion
-----------------------------------------
0.300% Next $40 billion
-----------------------------------------
0.295% Thereafter
-----------------------------------------------------------------------------------------------------------------
</TABLE>
/a/ Represents a blended group fee rate containing various break points.
The fund's portion of the group fee is determined by the ratio of its daily
net assets to the daily net assets of all the T. Rowe Price funds described
previously. Based on combined T. Rowe Price funds' assets of over $89 billion
at December 31, 1998, the group fee was 0.32%. The individual fund fee is
0.15%.
<PAGE>
MORE ABOUT THE FUND
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 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. Therefore, total return
numbers include the effect of compounding.
Advertisements for a fund may include cumulative or average annual total
return figures, which may be compared with various indices, other performance
measures, or other mutual funds.
Cumulative Total Return
This is the actual return of an investment for a specified period. A
cumulative return does not indicate how much the value of the investment may
have fluctuated during the period. For example, a fund could have a 10-year
positive cumulative return despite experiencing three negative years during
that time.
Average Annual Total Return
This is always hypothetical and should not be confused with actual
year-by-year results. It smooths out all the variations in annual performance
to tell you what constant year-by-year return would have produced the
investment's actual cumulative return. This gives you an idea of an
investment's annual contribution to your portfolio, provided you held it for
the entire period.
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 objective
and certain investment restrictions noted in the following section as
"fundamental policies." The managers follow certain "operating policies,"
which can be changed without shareholder approval. However, significant
changes are
<PAGE>
T. ROWE PRICE
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.
The fund's holdings of certain kinds of investments cannot exceed maximum
percentages of total assets, which are set forth in this prospectus. For
instance, this fund is not permitted to invest more than 10% of total assets
in hybrid instruments. While these restrictions provide a useful level of
detail about the fund's investment program, investors should not view them as
an accurate gauge of the potential risk of such investments. For example, in
a given period, a 5% investment in hybrid instruments could have
significantly more of an impact on the fund's share price than its weighting
in the portfolio. The net effect of a particular investment depends on its
volatility and the size of its overall return in relation to the performance
of all the fund's other investments.
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.
. 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
various 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.
Common and Preferred Stocks
Stocks represent shares of ownership in a company. Generally, preferred stock
has a specified dividend and ranks after bonds and before common stocks in
its claim on income for dividend payments and on assets should the company be
liquidated. After other claims are satisfied, common stockholders participate
in company profits on a pro-rata basis; profits may be paid out in dividends
or reinvested in the company to help it grow. Increases and decreases in
earnings are usually reflected in a company's stock price, so common stocks
generally have the greatest appreciation and depreciation potential of all
corporate securities. While most preferred stocks pay a dividend, the fund
may purchase preferred
<PAGE>
MORE ABOUT THE FUND
stock where the issuer has omitted, or is in danger of omitting, payment of
its dividend. Such investments would be made primarily for their capital
appreciation potential.
Convertible Securities and Warrants
The fund may invest in debt or preferred equity securities convertible into,
or exchangeable for, equity securities. Traditionally, convertible securities
have paid dividends or interest at rates higher than common stocks but lower
than nonconvertible securities. They generally participate in the
appreciation or depreciation of the underlying stock into which they are
convertible, but to a lesser degree. In recent years, convertibles have been
developed which combine higher or lower current income with options and other
features. Warrants are options to buy a stated number of shares of common
stock at a specified price anytime during the life of the warrants
(generally, two or more years).
Foreign Securities
The fund may invest in foreign securities. These include
nondollar-denominated securities traded outside of the U.S. and
dollar-denominated securities of foreign issuers traded in the U.S. (such as
ADRs). Such investments increase a portfolio's diversification and may
enhance return, but they also involve some special risks, such as exposure to
potentially adverse local political and economic developments;
nationalization and exchange controls; potentially lower liquidity and higher
volatility; possible problems arising from accounting, disclosure,
settlement, and regulatory practices that differ from U.S. standards; and the
chance that fluctuations in foreign exchange rates will decrease the
investment's value (favorable changes can increase its value). These risks
are heightened for investments in developing countries, and there is no limit
on the amount of the fund's foreign investments that may be made in such
countries.
Operating policy The fund may invest up to 25% of its total assets
(excluding reserves) in foreign securities.
Private Placements
These securities are sold directly to a small number of investors, usually
institutions. Unlike public offerings, such securities are not registered
with the SEC. Although certain of these securities may be readily sold, for
example, under Rule 144A, others may be illiquid, and their sale may involve
substantial delays and additional costs.
Operating policy The fund may invest up to 15% of its net assets in illiquid
securities.
Debt Securities
A bond or money market instrument is usually an interest-bearing security- an
IOU-issued by companies or governmental units. The issuer has a contractual
obligation to pay interest at a stated rate on specific dates and to repay
principal
<PAGE>
T. ROWE PRICE
(the bond's face value) on a specified date. An issuer may have the right to
redeem or "call" a bond before maturity, and the investor may have to
reinvest the proceeds at lower market rates. Money market securities and
bonds (such as zero coupon bonds) may also be issued in discounted form to
reflect the rate of interest paid. In such a case, no coupon interest is
paid, but the security's price is discounted so that the interest is realized
when the security matures at face value.
A bond's annual interest income, set by its coupon rate, is usually fixed for
the life of the bond. Its yield (income as a percent of current price) will
fluctuate to reflect changes in interest rate levels. Except for adjustable
rate instruments, a money market security's interest rate, as reflected in
the coupon rate or discount, is usually fixed for the life of the security.
Its current yield (coupon or discount as a percent of current price) will
fluctuate to reflect changes in interest rate levels. A bond's price usually
rises when interest rates fall, and vice versa, so its yield stays current.
Bonds may be unsecured (backed by the issuer's general creditworthiness only)
or secured (also backed by specified collateral).
Certain bonds have interest rates, adjusted periodically. These interest rate
adjustments tend to minimize fluctuations in the bonds' principal values. The
maturity of those securities may be shortened under certain conditions.
Bonds may be senior or subordinated obligations. Senior obligations generally
have the first claim on a corporation's earnings and assets and, in the event
of liquidation, are paid before subordinated debt.
In addition to conventional corporate bonds, some of the debt securities in
which the fund may invest are described below. Unless otherwise indicated
here or in the fund's overall program, there is no limit on the amount that
may be committed to any of these securities.
Asset-Backed Securities
An underlying pool of assets, such as credit card or automobile trade
receivables or corporate loans or bonds, backs these bonds and provides the
interest and principal payments to investors. Credit quality depends
primarily on the quality of the underlying assets and the level of credit
support, if any, provided by the issuer. The underlying assets (i.e., loans)
are subject to prepayments which can shorten the securities' weighted average
life and may lower their return. The value of these securities also may
change because of actual or perceived changes in the creditworthiness of the
originator, the servicing agent, or the financial institution providing the
credit support.
<PAGE>
MORE ABOUT THE FUND
Mortgage-Backed Securities
The fund may invest in a variety of mortgage-backed securities. Mortgage
lenders pool individual home mortgages with similar characteristics to back a
certificate or bond, which is sold to investors such as the fund. Interest
and principal payments generated by the underlying mortgages are passed
through to the investors. The "big three" issuers are the Government National
Mortgage Association (GNMA), the Federal National Mortgage Association
(Fannie Mae), and the Federal Home Loan Mortgage Corporation (Freddie Mac).
GNMA certificates are backed by the full faith and credit of the U.S.
government, while others, such as Fannie Mae and Freddie Mac certificates,
are only supported by the ability to borrow from the U.S. Treasury or
supported only by the credit of the agency. Private mortgage bankers and
other institutions also issue mortgage-backed securities.
Mortgage-backed securities are subject to scheduled and unscheduled principal
payments as homeowners pay down or prepay their mortgages. As these payments
are received, they must be reinvested when interest rates may be higher or
lower than on the original mortgage security. Therefore, these securities are
not an effective means of locking in long-term interest rates. In addition,
when interest rates fall, the pace of mortgage prepayments picks up. These
refinanced mortgages are paid off at face value (par), causing a loss for any
investor who may have purchased the security at a price above par. In such an
environment, this risk limits the potential price appreciation of these
securities and can negatively affect the fund's net asset value. When rates
rise, the prices of mortgage-backed securities can be expected to decline,
although historically these securities have experienced smaller price
declines than comparable quality bonds. In addition, when rates rise and
prepayments slow, the effective duration of mortgage-backed securities
extends, resulting in increased volatility.
Additional mortgage-backed securities in which the fund may invest include:
. Collateralized Mortgage Obligations (CMOs) CMOs are debt securities that are
fully collateralized by a portfolio of mortgages or mortgage-backed
securities. All interest and principal payments from the underlying mortgages
are passed through to the CMOs in such a way as to create, in most cases,
more definite maturities than is the case with the underlying mortgages. CMOs
may pay fixed or variable rates of interest, and certain CMOs have priority
over others with respect to the receipt of prepayments.
. Stripped Mortgage Securities Stripped mortgage securities (a type of
potentially high-risk derivative) are created by separating the interest and
principal payments generated by a pool of mortgage-backed securities or a CMO
to create additional classes of securities. Generally, one class receives
only interest payments (IOs), and another receives principal payments (POs).
Unlike with other mortgage-backed securities and POs, the value of IOs tends
to move in the same direction
<PAGE>
T. ROWE PRICE
as interest rates. The fund can use IOs as a hedge against falling prepayment
rates (interest rates are rising) and/or a bear market environment. POs can
be used as a hedge against rising prepayment rates (interest rates are
falling) and/or a bull market environment. IOs and POs are acutely sensitive
to interest rate changes and to the rate of principal prepayments.
A rapid or unexpected increase in prepayments can severely depress the price
of IOs, while a rapid or unexpected decrease in prepayments could have the
same effect on POs. These securities are very volatile in price and may have
lower liquidity than most other mortgage-backed securities. Certain
non-stripped CMOs may also exhibit these qualities, especially those that pay
variable rates of interest that adjust inversely with, and more rapidly than,
short-term interest rates. In addition, if interest rates rise rapidly and
prepayment rates slow more than expected, certain CMOs, in addition to losing
value, can exhibit characteristics of longer-term securities and become more
volatile. There is no guarantee the fund's investment in CMOs, IOs, or POs
will be successful, and the fund's total return could be adversely affected
as a result.
Operating policy The fund may invest up to 20% of its total assets in
mortgage-backed securities, including 10% in stripped mortgage securities.
High-Yield, High-Risk Investing
The total return and yield of lower-quality (high-yield, high-risk) bonds,
commonly referred to as "junk" bonds, can be expected to fluctuate more than
the total return and yield of higher-quality, shorter-term bonds, but not as
much as those of common stocks. Junk bonds (those rated below BBB or in
default) are regarded as predominantly speculative with respect to the
issuer's continuing ability to meet principal and interest payments.
Operating policy The fund may purchase any type of noninvestment-grade debt
security (or junk bond) including those in default. The fund will not
purchase this type of security if immediately after such purchase the fund
would have more than 10% of its total assets invested in such securities. The
fund's investments in convertible securities are not subject to this limit.
. The fund may continue to hold a security that has been downgraded or loses
its investment-grade rating after purchase.
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 or interest rate of a hybrid could be tied (positively or
negatively) to the price of some commodity, currency, or securities index or
another interest rate (each a "benchmark"). Hybrids can be used as an
efficient means of pursuing a variety of investment goals, including currency
hedging, duration management, and increased total return. Hybrids may not
bear interest or pay dividends. The
<PAGE>
MORE ABOUT THE FUND
value of a hybrid or its interest rate may be a multiple of a benchmark and,
as a result, may be leveraged and move (up or down) more steeply and rapidly
than the benchmark. These benchmarks may be sensitive to economic and
political events, such as commodity shortages and currency devaluations,
which cannot be readily foreseen by the purchaser of a hybrid. Under certain
conditions, the redemption value of a hybrid could be zero. Thus, an
investment in a hybrid may entail significant market risks that are not
associated with a similar investment in a traditional, U.S.
dollar-denominated bond that has a fixed principal amount and pays a fixed
rate or floating rate of interest. The purchase of hybrids also exposes the
fund to the credit risk of the issuer of the hybrid. These risks may cause
significant fluctuations in the net asset value of the fund.
. 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 Investment Management Practices
Reserve Position
The fund will hold a certain portion of its assets in money market reserves.
The fund's reserve position is expected to consist primarily of shares of one
or more T. Rowe Price internal money market funds. Short-term, high-quality
U.S. and foreign dollar-denominated money market securities, including
repurchase agreements, may also be held. For temporary, defensive purposes,
the fund may invest without limitation in money market reserves. The effect
of taking such a position is that the fund may not achieve its investment
objective. The reserve position provides flexibility in meeting redemptions,
expenses, and the timing of new investments and can serve as a short-term
defense during periods of unusual market volatility.
Borrowing Money and Transferring Assets
The fund can borrow money from banks and other Price funds 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 policy 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.
<PAGE>
T. ROWE PRICE
Futures and Options
Futures (a type of potentially high-risk derivative) are often used to manage
or hedge risk because they enable the investor to buy or sell an asset in the
future at an agreed-upon price. Options (another type of potentially
high-risk derivative) give the investor the right (where the investor
purchases the option), or the obligation (where the investor writes (sells)
the option), to buy or sell an asset at a predetermined price in the future.
The fund may buy and sell futures and options contracts for any number of
reasons, including: to manage its exposure to changes in securities prices
and foreign currencies; as an efficient means of adjusting its overall
exposure to certain markets; in an effort to enhance income; as a cash
management tool; and to protect the value of portfolio securities. The fund
may purchase, sell, or write call and put options on securities, financial
indices, and foreign currencies.
Futures contracts and options may not always be successful hedges; their
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 exceed 5% of the fund's net asset
value. Options on securities: The total market value of securities against
which the fund writes call or put options may not exceed 25% of its total
assets. The fund will not commit more than 5% of its total assets to premiums
when purchasing call or put options.
Managing Foreign Currency Risk
Investors in foreign securities may "hedge" their exposure to potentially
unfavorable currency changes by purchasing a contract to exchange one
currency for another on some future date at a specified exchange rate. In
certain circumstances, a "proxy currency" may be substituted for the currency
in which the investment is denominated, a strategy known as "proxy hedging."
If the fund were to engage in foreign currency transactions, they would be
used primarily to protect the fund's foreign securities from adverse currency
movements relative to the dollar. Such transactions involve the risk that
anticipated currency movements will not occur, and the fund's total return
could be reduced.
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.
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MORE ABOUT THE FUND
Fundamental policy The value of loaned securities may not exceed
33/1//\\/3/\\% of total fund assets.
When-Issued Securities and Forward Commitment Contracts
The fund may purchase securities on a when-issued or delayed delivery basis
or may purchase or sell securities on a forward commitment basis. The price
of these securities is fixed at the time of the commitment to buy, but
delivery and payment can take place a month or more later. During the interim
period, the market value of the securities can fluctuate, and no interest
accrues to the purchaser. At the time of delivery, the value of the
securities may be more or less than the purchase or sale price. 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 that fund's net asset value
than if the fund did not purchase them.
Portfolio Turnover
The fund will not generally trade in securities (either common stocks or
bonds) 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 higher capital
gain distributions by the fund. The fund cannot accurately predict its annual
portfolio turnover rate for either the equity or fixed income portion of its
portfolio; however, the rates for the entire fund for the years ended
December 31, 1998, 1997, and 1996, were 12.5%, 15.5%, and 22.3%,
respectively.
Year 2000 Processing Issue
Many computer programs use two digits rather than four to identify the year.
These programs, if not adapted, will not correctly handle the change from
"99" to "00" on January 1, 2000, and will not be able to perform necessary
functions. The Year 2000 issue affects virtually all companies and
organizations.
T. Rowe Price has implemented steps intended to assure that major computer
systems and processes are capable of Year 2000 processing. We are working
with third parties to assess the adequacy of their compliance efforts and are
developing contingency plans intended to assure that third-party
noncompliance will not materially affect T. Rowe Price's operations.
Companies, organizations, governmental entities, and markets in which the T.
Rowe Price funds invest will be affected by the Year 2000 issue, but at this
time the funds cannot predict the degree of impact. For funds that invest in
foreign markets, especially emerging markets, it is possible foreign
companies and markets will not be as prepared for Year 2000 as domestic
companies and markets. To the extent the effect of Year 2000 is negative, a
fund's returns could be reduced.
<PAGE>
T. ROWE PRICE
FINANCIAL HIGHLIGHTS
----------------------------------------------------------
Table 4, 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 total returns in the table
represent the rate that an investor would have earned or lost on an
investment in the fund (assuming reinvestment of all dividends and
distributions). The financial statements in the annual report were audited by
the fund's independent accountants, PricewaterhouseCoopers LLP.
<TABLE>
Table 4 Financial Highlights
<CAPTION>
Year ended December 31
1994 1995 1996 1997 1998
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $ 12.02 $ 11.14 $ 13.22 $ 14.48 $ 16.54
Income From Investment Operations
Net investment income 0.43 0.48 0.51 0.53 0.53
------------------------------------------------------------
Net gains or losses
on securities (both
realized and (0.68) 2.24 1.38 2.18 2.07
unrealized)
------------------------------------------------------------
Total from investment
operations (0.25) 2.72 1.89 2.71 2.60
Less Distributions
Dividends (from net (0.43) (0.47) (0.50) (0.53) (0.52)
investment income)
------------------------------------------------------------
Distributions (from (0.20) (0.17) (0.13) (0.12) (0.03)
capital gains)
------------------------------------------------------------
Returns of capital -- -- -- -- --
------------------------------------------------------------
Total distributions (0.63) (0.64) (0.63) (0.65) (0.55)
------------------------------------------------------------
Net asset value, $ 11.14 $ 13.22 $ 14.48 $ 16.54 $ 18.59
end of period
------------------------------------------------------------
Total return (2.05)% 24.88% 14.57% 18.97% 15.97%
Ratios/Supplemental Data
Net assets, end of $392,003 $608,088 $875,973 $1,219,224 $1,649,799
period (in thousands)
------------------------------------------------------------
Ratio of expenses to 1.00% 0.95% 0.87% 0.81% 0.78%
average net assets
------------------------------------------------------------
Ratio of net income 3.72% 3.87% 3.70% 3.36% 3.04%
to average net assets
------------------------------------------------------------
Portfolio turnover 33.3% 12.6% 22.3% 15.5% 12.5%
rate
------------------------------------------------------------------------------------
</TABLE>
Note:
All share data figures have been restated to reflect the reorganization of
the fund effective August 31, 1992. The information provided for periods
prior to September 1, 1992, represents the activities of Axe-Houghton Fund B,
as restated.
<PAGE>
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
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
appropriate address in the next paragraph. We do not accept third-party checks
to open new accounts, except for IRA Rollover checks that are properly endorsed.
<PAGE>
T. ROWE PRICE
Mail via United States Postal Service
T. Rowe Price Account Services P.O. Box 17300 Baltimore, MD 21297-1300
Mail via private carriers/overnight services
T. Rowe Price Account Services 10090 Red Run Blvd. Owings Mills, MD 21117-4842
By Wire
Call Investor Services for an account number and give the following wire
information to your bank:
Receiving Bank: PNC Bank, N.A. (Pittsburgh) Receiving Bank ABA#: 043000096
Beneficiary: T. Rowe Price [fund name] Beneficiary Account: 1004397951
Originator to Beneficiary Information (OBI): name of owner(s) and account
number
Complete a New Account Form and mail it to one of the appropriate addresses
listed previously.
Note: No services will be established and IRS penalty withholding may occur
until a signed New Account Form is received. Also, retirement plan accounts and
IRAs cannot be opened by wire.
By Exchange
Call Shareholder Services or use Tele*Access or your personal computer (see
Automated Services under Information About Your 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 back cover and
obtain a receipt.
<PAGE>
INVESTING WITH T. ROWE PRICE
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 or 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 listed 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 following address 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.
Mail via United States Postal Service
T. Rowe Price Funds Account Services P.O. Box 17300 Baltimore, MD 21297-1300
/(For //mail via private carriers and overnight services//, 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
----------------------------------------------------------
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 fund is registered.)
<PAGE>
T. ROWE PRICE
Redemptions
Redemption proceeds can be mailed to your account address, sent by ACH transfer
to your bank, or wired to your bank (provided your bank information is already
on file). For charges, see Electronic Transfers - By Wire under Information
About Your Services.
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.
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.
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. 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). Please use the appropriate address below:
Mail via United States Postal Service
For nonretirement and IRA accounts
T. Rowe Price Account Services P.O. Box 17302 Baltimore, MD 21297-1302
For employer-sponsored retirement accounts
T. Rowe Price Trust Company P.O. Box 17479 Baltimore, MD 21297-1479
/(For// //mail via private carriers and overnight services//, see the
//addresses / /listed in the //Opening a New Account section.)/
Redemptions from employer-sponsored retirement accounts must be in writing;
please call T. Rowe Price Trust Company or your plan administrator for
<PAGE>
INVESTING WITH T. ROWE PRICE
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 following rights: (1) to waive or lower
investment minimums; (2) to accept initial purchases by telephone or mailgram;
(3) to refuse any purchase or exchange order; (4) to cancel or rescind any
purchase or exchange order (including, but not limited to, orders deemed to
result in excessive trading, market timing, fraud, or 5% ownership) 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; (5)
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; (6) to otherwise modify
the conditions of purchase and any services at any time; or (7) to act on
instructions believed to be genuine. These actions will be taken when, in the
sole discretion of management, they are deemed to be in the best interest of the
fund.
In an effort to protect the fund from the possible adverse effects of a
substantial redemption in a large account, as a matter of general policy, no
shareholder or group of shareholders controlled by the same person or group of
persons will knowingly be permitted to purchase in excess of 5% of the
outstanding shares of the fund, except upon approval of the fund's management.
<PAGE>
T. ROWE PRICE
INFORMATION ABOUT YOUR SERVICES
----------------------------------------------------------
Shareholder Services 1-800-225-5132 Investor Services 1-800-638-5660
Many services are available to you as a T. Rowe Price shareholder; some you
receive automatically, and others you must authorize or request 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 discusses some of the services currently offered. Our
Services Guide, which we mail to all new shareholders, contains detailed
descriptions of these and other services.
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: Traditional IRAs, Roth 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.
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 in this section).
Web Address www.troweprice.com
After obtaining proper authorization, account transactions may also be conducted
through our Web site on the Internet. If you subscribe to America Online/(R)/,
you can access our Web site via keyword "T. Rowe Price" and conduct transactions
in your account.
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.
<PAGE>
INVESTING WITH T. ROWE PRICE
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 back 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.
<PAGE>
T. ROWE PRICE
T. ROWE PRICE BROKERAGE
----------------------------------------------------------
To open an account 1-800-638-5660 For existing brokerage investors
1-800-225-7720
This service gives you the opportunity to consolidate all of your investments
with one company. Investments available through our brokerage service include
stocks, options, bonds, and others at commission savings over full-service
brokers. We also provide a wide range of services, including:
Automated telephone and computer services
You can enter stock and option orders, access quotes, and review account
information around the clock by phone with Tele-Trader or via the Internet with
Internet-Trader. Any trades executed through Tele-Trader save you an additional
10% on commissions. You will save 20% on commissions for stock trades and 10% on
option trades when you use Internet-Trader. All trades are subject to a $35
minimum commission except stock trades placed through Internet-Trader, which are
subject to a $29.95 minimum commission.
Investor information
A variety of informative reports, such as our Brokerage Insights series and S&P
Market Month newsletter, as well as access to on-line research tools can help
you better evaluate economic trends and investment opportunities.
Dividend Reinvestment Service
Virtually all stocks held in customer accounts are eligible for this free
service. If you elect to participate in this service, the cash dividends from
your eligible securities will automatically be reinvested in additional shares
of the same securities free of charge. Dividend payments must be $10.00 or
greater to qualify for reinvestment. Most securities listed on national
securities exchanges or on Nasdaq are eligible for this service.
/T. Rowe Price// Brokerage is a division of T. Rowe Price Investment /
/Services, Inc., Member NASD/SIPC./
<PAGE>
INVESTING WITH T. ROWE PRICE
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. Most of this information is also
available on our Web site at www.troweprice.com.
Shareholder Reports
Fund managers' reviews of their strategies and performance. 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
A 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, Diversifying Overseas: A T. Rowe
Price Guide to International Investing, Managing Your Retirement Distribution,
Personal Strategy Planner, Retirees Financial Guide, Retirement Planning Kit,
and Tax Considerations for Investors.
<PAGE>
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
informative reports.
For Mutual Fund or T. Rowe Price Brokerage Information
Investor Services
1-800-638-5660
For Existing Accounts
Shareholder Services
1-800-225-5132
For Yields, Prices, Account Information, or to Conduct Transactions
Tele*Access/(R)/
24 hours, 7 days 1-800-638-2587
Internet Address
www.troweprice.com
Plan Account Line
For retirement plan investors 1-800-401-3279
Walk-in
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
4200 West Cypress St. 10th Floor Tampa, FL 33607
Headquarters
100 East Pratt St. Baltimore, MD 21202
A Statement of Additional Information about the fund has been filed with the
Securities and Exchange Commission and is incorporated by reference into this
prospectus. Further information about the fund's investments, including a review
of market conditions and the manager's recent strategies and their impact on
performance, is available in the annual and semiannual shareholder reports. To
obtain free copies of any of these documents, or for shareholder inquiries, call
1-800-638-5660.
Fund reports and Statements of Additional Information are also available from
the Securities and Exchange Commission by calling 1-800-SEC-0330 or by writing
the SEC's Public Reference Section, Washington, D.C. 20549-6009 (you will be
charged a duplicating fee); by visiting the SEC's public reference room; or by
consulting the SEC's Web site at www.sec.gov.
1940 Act File No. 811-6275
LOGO
F68-040 5/1/99
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
The date of this Statement of Additional Information is May 1, 1999.
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 STOCK FUND, INC.
T. ROWE PRICE SMALL-CAP VALUE FUND, INC.
T. ROWE PRICE VALUE FUND, INC.
and
INSTITUTIONAL EQUITY FUNDS, INC.
Mid-Cap Equity Growth Fund
______________________________________________________________________________
Mailing Address:
T. Rowe Price Investment Services, Inc.
100 East Pratt Street
Baltimore, Maryland 21202
1-800-638-5660
This Statement of Additional Information is not a prospectus but should be
read in conjunction with the appropriate Fund prospectus dated May 1, 1999,
which may be obtained from T. Rowe Price Investment Services, Inc.
("Investment Services").
Each Fund's financial statements for the year ended December 31, 1998, and
the report of independent accountants are included in each Fund's Annual
Report and incorporated by reference into this Statement of Additional
Information.
If you would like a prospectus or an annual or semiannual shareholder report
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.
C20-043 5/1/99
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
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Page Page
---- ----
<S> <C> <C> <S> <C>
Capital Stock 65 Legal Counsel 67
- ---------------------------------- ----------------------------------------
Code of Ethics 53 Management of the Funds 28
- ---------------------------------- ----------------------------------------
Custodian 53 Net Asset Value Per Share 60
- ---------------------------------- ----------------------------------------
Distributor for the Funds 52 Organization of the Funds 66
- ---------------------------------- ----------------------------------------
Dividends and 60 Portfolio Management Practices 14
Distributions
- ---------------------------------- ----------------------------------------
Federal Registration of 67 Portfolio Transactions 54
Shares
- ---------------------------------- ----------------------------------------
Independent Accountants 67 Pricing of Securities 59
- ---------------------------------- ----------------------------------------
Investment Management 47 Principal Holders of Securities 46
Services
- ---------------------------------- ----------------------------------------
Investment Objectives and 2 Ratings of Corporate Debt 70
Policies Securities
- ---------------------------------- ----------------------------------------
Investment Performance 61 Risk Factors 2
- ---------------------------------- ----------------------------------------
Investment Program 5 Shareholder Services by Outside 53
Parties
- ---------------------------------- ----------------------------------------
Investment Restrictions 26 Tax Status 60
- ---------------------------------- ----------------------------------------
</TABLE>
INVESTMENT OBJECTIVES AND POLICIES
-------------------------------------------------------------------------------
The following information supplements the discussion of each Fund's
investment objectives and policies discussed in the Funds' 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. References to the following are as
indicated:
Investment Company Act of 1940 ("1940 Act")
Securities and Exchange Commission ("SEC")
T. Rowe Price Associates, Inc. ("T. Rowe Price")
Moody's Investors Service, Inc. ("Moody's")
Standard & Poor's Corporation ("S&P")
Internal Revenue Code of 1986 ("Code")
Rowe Price-Fleming International, Inc. ("Price-Fleming")
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
-------------------------------------------------------------------------------
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.
<PAGE>
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 every 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.
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 mutual fund while
others relate more to the countries in which the Fund will invest.
. Political and Economic Factors Individual foreign economies of certain
countries 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 1994-1995,
the Mexican peso plunged in value setting off a severe crisis in the Mexican
economy. Asia is still coming to terms with its own crisis and recessionary
conditions sparked off by widespread currency weakness in late 1997. In 1998,
there was substantial turmoil in markets throughout the world. 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 and hostile relations 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 invests 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 limit at times and preclude investment
in certain of such countries and increase the cost and expenses of the Fund.
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. In 1998, the
government of Malaysia imposed currency controls which effectively made it
impossible for foreign investors to convert Malaysian ringgits to foreign
currencies.
<PAGE>
. Market Characteristics It is contemplated that most foreign securities will
be purchased in over-the-counter markets or on securities 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 American Depository
Receipts ("ADRs") traded in the United States. Foreign securities markets are
generally not as developed or efficient as, and more volatile than, those in
the United States. While growing in volume, they usually have substantially
less volume than U.S. markets and the Fund's portfolio securities may be less
liquid and subject to more rapid and erratic price movements than securities
of comparable U.S. companies. Securities may trade at price/earnings
multiples higher than comparable United States securities and such levels may
not be sustainable. Commissions on foreign securities are generally higher
than commissions on United States exchanges, and while there is an increasing
number of overseas securities markets that have adopted a system of
negotiated rates, a number are still subject to an established schedule of
minimum commission rates. There is generally less government supervision and
regulation of foreign securities 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 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 the 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. The Fund's investment in these funds
is subject to the provisions of the 1940 Act. 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 is often 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. The collapse of the ruble from its crawling peg
exchange rate against the U.S. dollar has set back the path of reform for
several years. 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
<PAGE>
countries, and these authorities may not qualify as a foreign custodian under
the 1940 Act 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. The 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.
. 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.
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 restrict the free conversion of
their currency into foreign currencies, including the U.S. dollar. There is
no significant foreign exchange market for many 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
-------------------------------------------------------------------------------
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.
<PAGE>
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
transaction 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.
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
<PAGE>
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.
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 following: (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, Health
Sciences, 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
<PAGE>
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.
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 were investing in higher-quality bonds. High-yield bonds may be
more susceptible to real or perceived adverse economic conditions than
investment-grade bonds. A projection of an economic downturn, or higher
interest rates, for example, could cause a decline in high-yield 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.
<PAGE>
. 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 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, liquid, high-grade debt securities, or
other suitable cover as permitted by the SEC 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 or one of its agencies
or instrumentalities, such as the Government National
<PAGE>
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 "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") 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 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
Certificates are not supported by the full faith and credit of the U.S.
government; rather, Farmer Mac may borrow 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
<PAGE>
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 in 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).
Monthly distributions of interest, as contrasted to semiannual 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.
. 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.
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, average 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.
<PAGE>
. 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.
. Stripped Mortgage-Backed Securities These instruments are a type of
potentially high-risk derivative. They 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. IOs and POs are usually structured as tranches of a CMO.
Stripped 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 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. In the case of IOs, prepayments affect the amount, but not
the timing, of cash flows provided to the investor. In contrast, prepayments
on the mortgage pool affect the timing, but not the amount, of cash flows
received by investors in POs. 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 SEC 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.
<PAGE>
Under the staff's position, the determination of whether a particular
government-issued IO or PO backed by fixed rate mortgages is liquid 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 tranches; size of the issue
and the number of dealers who make a market in the IO or PO. The Fund will
treat nongovernment-issued IOs and POs not backed by fixed or adjustable rate
mortgages as illiquid unless and until the SEC staff 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.
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
<PAGE>
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 Code
or failing to maintain exemption from the 1940 Act.
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,
within such period of time which coincides with the normal settlement period
for purchases and sales of such securities in the respective 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 risks in
lending portfolio securities, as with other extensions of secured credit,
consist of possible delay in receiving additional collateral or in the
recovery of the securities or possible loss of rights in the collateral
should the borrower fail financially. Loans will only be made to 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.
Interfund Borrowing and Lending
The Fund is a party to an exemptive order received from the SEC on December
8, 1998, that permits it to borrow money from and/or lend money to other
funds in the T. Rowe Price complex ("Price Funds"). All loans are set at an
interest rate between the rate charged on overnight repurchase agreements and
short-term bank loans. All loans are subject to numerous conditions designed
to ensure fair and equitable treatment of all participating funds. The
program is subject to the oversight and periodic review of the Boards of
Directors of the Price Funds.
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 S&P, P1 by Moody's, 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 (1) the underlying securities are of the type (excluding
maturity limitations) which the Fund's investment guidelines would allow it
to purchase directly, (2) the market value of the underlying security,
including interest
<PAGE>
accrued, will be at all times equal to or exceed the value of the repurchase
agreement, and (3) 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.")
Money Market Reserves
It is expected that the Fund will invest its 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 SEC (Investment Company Act Release
No. IC-22770, July 29, 1997).
Both funds must comply with the requirements of Rule 2a-7 under the 1940 Act
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 Fund. 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 Fund
will only invest in RIF or GRF to the extent it is consistent with its
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.
All Funds except Equity Index 500, Extended Equity Market Index, and Total
Equity Market Index Funds
Options
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
<PAGE>
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 generally will write only covered call options. This means that the
Fund will either 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. From time to time, the Fund will write a call option that is not
covered as indicated above but where the Fund will establish and maintain
with its custodian for the term of the option, an account consisting of cash,
U.S. government securities, other liquid high-grade debt obligations, or
other suitable cover as permitted by the SEC having a value equal to the
fluctuating market value of the optioned securities or currencies. While such
an option would be "covered" with sufficient collateral to satisfy SEC
prohibitions on issuing senior securities, this type of strategy would expose
the Fund to the risks of writing uncovered options.
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 writing of naked or uncovered options, which the Fund
generally 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. If the Fund
writes an uncovered option as described above, it will bear the risk of
having to purchase the security subject to the option at a price higher than
the exercise price of the option. As the price of a security could appreciate
substantially, the Fund's loss could be significant.
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
<PAGE>
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 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, other liquid high-grade debt obligations, or other suitable cover
as determined by the SEC, 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.
<PAGE>
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 next.
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 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 next.
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
<PAGE>
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) 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 Over-the-Counter ("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.
(Equity Index 500, Extended Equity Market Index, and Total Equity Market
Index Funds)
Options
Options are a type of potentially high-risk derivative.
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." However, the Funds reserve the right to engage in other
options activity.
<PAGE>
All Funds
Futures Contracts
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. They 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.
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. 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
If the Fund purchases or sells futures contracts or related options which do
not qualify as bona fide hedging under applicable CFTC rules, the aggregate
initial margin deposits and premium required to establish those positions
cannot exceed 5% of the liquidation 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, liquid assets, or
other suitable cover as permitted by the SEC, equal to the market value of
the futures contracts and options thereon (less any related margin deposits),
will be identified by the Fund to cover the position, or alternative cover
(such as owning an offsetting position) will be employed. Assets used as
cover or held in an identified account cannot be sold while the position in
the corresponding option or future is open, unless they are replaced with
similar assets. As a result, the commitment of a large portion of a Fund's
assets to cover or identified accounts could impede portfolio management or
the Fund's ability to meet redemption requests or other current obligations.
<PAGE>
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, or liquid assets known as "initial margin." The margin required for
a particular futures contract is set by the exchange on which the contract is
traded, and may be significantly modified from time to time by the exchange
during the term of the contract. Futures contracts are customarily purchased
and sold on margins that may range upward from less than 5% of the value of
the contract being traded.
If the price of an open futures contract changes (by increase in the case of
a sale or by decrease in the case of a purchase) so that the loss on the
futures contract reaches a point at which the margin on deposit does not
satisfy margin requirements, the broker will require an increase in the
margin. However, if the value of a position increases because of favorable
price changes in the futures contract so that the margin deposit exceeds the
required margin, the broker will pay the excess to the Fund.
These subsequent payments, called "variation margin," to and from the futures
broker, are made on a daily basis as the price of the underlying assets
fluctuate, making the long and short positions in the futures contract more
or less valuable, a process known as "marking to market."
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 S&P'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 futures contracts on the S&P 500 Index, the contracts
are to buy or sell 250 units. Thus, if the value of the S&P 500 Index were
$150, one contract would be worth $37,500 (250 units x $150). The stock index
futures contract specifies that no delivery of the actual stocks 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 250 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 $1,000 (250 units x gain of $4). If the Fund
enters into a futures contract to sell 250 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 $500 (250 units x loss of $2).
<PAGE>
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.
. 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 next, 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.
<PAGE>
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 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
financial 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
nondiscriminatory manner.
Special Risks of Transactions in Options on Futures Contracts
The risks described under "Special Risks in Transactions on Futures
Contracts" are substantially the same as the risks of using options on
futures. If the Fund were to write an option on a futures contract, it would
be required to deposit and maintain initial and variation margin in the same
manner as a regular futures contract. 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
<PAGE>
maintenance of a liquid secondary market. Reasons for the absence of a liquid
secondary market on an exchange include the following: (1) there may be
insufficient trading interest in certain options; (2) restrictions may be
imposed by an exchange on opening transactions or closing transactions or
both; (3) trading halts, suspensions or other restrictions may be imposed
with respect to particular classes or series of options, or underlying
instruments; (4) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (5) the facilities of an exchange or a clearing
corporation may not at all times be adequate to handle current trading
volume; or (6) 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.
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.
All Funds except Equity Index 500, Extended Equity Market Index, and Total
Equity Market Index Funds
Foreign Currency Transactions
A forward foreign currency exchange contract involves an obligation to
purchase or sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract agreed upon by the parties, at a
price set at the time of the contract. These contracts are principally traded
in the interbank market conducted directly between currency traders (usually
large, commercial banks) and their customers. A forward contract generally
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:
<PAGE>
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 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, currency
available for cover of the forward contract(s) or other suitable cover as
permitted by the SEC. 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.
<PAGE>
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 there are costs
associated with 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
Options, futures and forward foreign exchange contracts, including options
and futures on currencies, which offset a foreign dollar denominated bond or
currency position may be considered straddles for tax purposes, in which case
a loss on any position in a straddle will be subject to deferral to the
extent of unrealized gain in an offsetting position. The holding period of
the securities or currencies comprising the straddle will be deemed not to
begin until the straddle is terminated. 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 12 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. Tax regulations could be issued limiting 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.
As a result of the "Taxpayer 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
Fund's 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. The Fund may borrow from banks, other
Price Funds, or other persons to the extent permitted by applicable law;
<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 Purchase a security
if, as a result, with respect to 75% of the value of the Fund's total
assets, more than 10% of the outstanding voting securities of any issuer
would be held by the Fund (other than obligations issued or guaranteed by
the U.S. government, its agencies or instrumentalities);
(7) Real Estate Purchase or sell real estate, including limited partnership
interests therein, unless acquired as a result of ownership of securities
or other instruments (but this shall not prevent the Fund from investing
in securities or other instruments backed by real estate or securities of
companies engaged in the real estate business);
(8) Senior Securities Issue senior securities except in compliance with the
1940 Act; 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 1933 Act 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 restriction (2), the Fund does not consider
currency contracts or hybrid investments to be commodities.
For purposes of investment restriction (3), U.S., state or local
governments, or related agencies or instrumentalities, are not considered
an industry. Industries are determined by reference to the
classifications of industries set forth in the Fund's semiannual and
annual reports. It is the position of the Staff of the SEC that foreign
governments are industries for purposes of this restriction.
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.
<PAGE>
Operating Policies
As a matter of operating policy, the Fund may not:
(1) Borrowing 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, 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 1940 Act; or (ii)
securities of the Reserve Investment or 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 210% 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.
MANAGEMENT OF THE FUNDS
-------------------------------------------------------------------------------
The officers and directors/trustees 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/trustees who are considered "interested
<PAGE>
persons" of T. Rowe Price as defined under Section 2(a)(19) of the 1940 Act
are noted with an asterisk (*). These directors/trustees are referred to as
inside directors by virtue of their officership, directorship, and/or
employment with T. Rowe Price.
All Funds
Independent Directors/Trustees/(a)/
DONALD W. DICK, JR., 1/27/43, Principal, EuroCapital Advisors, LLC, an
acquisition and management advisory firm; formerly (5/89-6/95) Principal,
Overseas Partners, Inc., a financial investment firm; formerly (6/65-3/89)
Director and Vice President; Consumer Products Division, McCormick & Company,
Inc., international food processors; Director, Waverly, Inc., Baltimore,
Maryland; Address: 925 Cleveland Street, #177, Greenville, South Carolina
29601
DAVID K. FAGIN, 4/9/38, Chairman and Chief Executive Officer, Western
Exploration and Development, Ltd.; Director Golden Star Resources Ltd. and
Miranda Mining Development Corporation; formerly (7/91- 9/97) Chairman,
Chief Executive Officer, Golden Star Resources Ltd.; (1986-7/91) President,
Chief Operating Officer and Director, Homestake Mining Company; Address: 1700
Lincoln Street, Suite 4710, Denver, Colorado 80203
HANNE M. MERRIMAN, 11/16/41, Retail business consultant; formerly President
and Chief Operating Officer (1991-92), Nan Duskin, Inc., a women's specialty
store, Director (1984-90) 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, 8/2/33, Owner/President, Stonington Capital Corporation, a
private investment company; Address: 1114 State Street, Suite 247, P.O. Box
90409, Santa Barbara, California 93190-0409
PAUL M. WYTHES, 6/23/33, 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
(a) Unless otherwise indicated, the Independent Directors/Trustees have been
at their respective companies for at least five years.
Officers
HENRY H. HOPKINS, 12/23/42, 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
PATRICIA S. LIPPERT, 1/12/53, Secretary-Assistant Vice President, T. Rowe
Price and T. Rowe Price Investment Services, Inc.
CARMEN F. DEYESU, 8/1/41, Treasurer-Vice President, T. Rowe Price, T. Rowe
Price Services, Inc., and T. Rowe Price Trust Company
DAVID S. MIDDLETON, 1/18/56, Controller-Vice President, T. Rowe Price and T.
Rowe Price Trust Company
J. JEFFREY LANG, 1/10/62, Assistant Vice President-Assistant Vice President,
T. Rowe Price; Vice President, T. Rowe Price Trust Company
INGRID I. VORDEMBERGE, 9/27/35, Assistant Vice President-Employee, T. Rowe
Price
Balanced Fund
* JAMES A.C. KENNEDY, 8/17/53, Director and Vice President -Director and
Managing Director, T. Rowe Price; Chartered Financial Analyst
<PAGE>
* JAMES S. RIEPE, 6/25/43, Chairman of the Board -Vice Chairman of the Board,
Managing Director, and Director, T. Rowe Price; Chairman of the Board, T.
Rowe Price Investment Services, Inc., T. Rowe Price Services, Inc., and T.
Rowe Price Retirement Plan Services, Inc.; Chairman of the Board, President,
and Trust Officer, T. Rowe Price Trust Company; Director, Price-Fleming and
General Re Corporation
* M. DAVID TESTA, 4/22/44, Director and Vice President -Chairman of the Board
and Director, 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, 5/7/58, President -Managing Director, T. Rowe Price; Vice
President, Price-Fleming and T. Rowe Price Trust Company; Chartered Financial
Analyst
STEPHEN W. BOESEL, 12/28/44, Vice President -Managing Director, T. Rowe
Price; Vice President, T. Rowe Price Trust Company and T. Rowe Price
Retirement Plan Services, Inc.
ANDREW M. BROOKS, 2/16/56, Vice President -Vice President, T. Rowe Price
RAYMOND A. MILLS, PHD, 12/3/60, Vice President -Assistant Vice President, T.
Rowe Price; formerly a Principal Systems Engineer at TASC, Inc.
EDMUND M. NOTZON, 10/1/45, Vice President -Managing Director, T. Rowe Price;
Vice President, T. Rowe Price Trust Company; Chartered Financial Analyst
DONALD J. PETERS, 7/3/59, Vice President -Vice President, T. Rowe Price;
formerly portfolio manager, Geewax Terker and Company
MARK J. VASELKIV, 7/22/58, Vice President -Vice President, T. Rowe Price
Blue Chip Growth Fund
* JAMES A.C. KENNEDY, 8/17/53, Director -Director and Managing Director, T.
Rowe Price; Chartered Financial Analyst
* JAMES S. RIEPE, 6/25/43, Director and Vice President -Vice Chairman of the
Board, Managing Director, and Director, T. Rowe Price; Chairman of the Board,
T. Rowe Price Investment Services, Inc., T. Rowe Price Services, Inc., and T.
Rowe Price Retirement Plan Services, Inc.; Chairman of the Board, President,
and Trust Officer, T. Rowe Price Trust Company; Director, Price-Fleming and
General Re Corporation
* M. DAVID TESTA, 4/22/44, Director -Chairman of the Board and Director,
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, 8/25/60, President -Managing Director, T. Rowe Price;
Chartered Financial Analyst
BRIAN W.H. BERGHUIS, 12/12/58, Vice President -Managing Director, T. Rowe
Price; Chartered Financial Analyst
STEPHANIE C. CLANCY, 12/19/64, Vice President -Vice President, T. Rowe Price
ROBERT N. GENSLER, 10/18/57, Vice President -Vice President, T. Rowe Price
JILL L. HAUSER, 6/23/58, Vice President -Vice President, T. Rowe Price
SEEMA R. HINGORANI, 1/21/69, Vice President -Assistant Vice President, T.
Rowe Price; formerly Associate Equity Analyst, Donaldson, Lufkin & Jenrehe
THOMAS J. HUBER, 9/23/66, Vice President -Vice President, T. Rowe Price;
formerly a Corporate Banking Officer with NationsBank; Chartered Financial
Analyst
STEPHEN C. JANSEN, 12/12/68, Vice President -Assistant Vice President, T.
Rowe Price; formerly an Investment Analyst at Schroder & Co.
KRIS H. JENNER, M.D., 2/5/62, Vice President -Vice President, T. Rowe Price;
formerly with the Laboratory of Biological Cancer, The Brigham & Women's
Hospital, Harvard Medical School
<PAGE>
ROBERT W. SHARPS, 6/10/71, Vice President -Assistant Vice President, T. Rowe
Price; formerly Senior Consultant, KPMG Peat Marwick; Chartered Financial
Analyst
ROBERT W. SMITH, 4/11/61, Vice President -Managing Director, T. Rowe Price;
Vice President, Price-Fleming
WILLIAM J. STROMBERG, 3/10/60, Vice President -Managing Director, T. Rowe
Price; Chartered Financial Analyst
Capital Appreciation Fund
* JAMES A.C. KENNEDY, 8/17/53, Trustee -Director and Managing Director, T.
Rowe Price; Chartered Financial Analyst
* JAMES S. RIEPE, 6/25/43, Trustee and Vice President -Vice Chairman of the
Board, Managing Director, and Director, T. Rowe Price; Chairman of the Board,
T. Rowe Price Investment Services, Inc., T. Rowe Price Services, Inc., and T.
Rowe Price Retirement Plan Services, Inc.; Chairman of the Board, President,
and Trust Officer, T. Rowe Price Trust Company; Director, Price-Fleming and
General Re Corporation
* M. DAVID TESTA, 4/22/44, Chairman of the Board -Chairman of the Board and
Director, 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, 9/16/46, President -Vice President, T. Rowe Price;
Chartered Financial Analyst
ARTHUR B. CECIL III, 9/15/42, Vice President -Vice President, T. Rowe Price;
Chartered Financial Analyst
STEPHANIE C. CLANCY, 12/19/64, Vice President -Vice President, T. Rowe Price
CHARLES A. MORRIS, 1/3/63, Vice President -Managing Director, T. Rowe Price;
Chartered Financial Analyst
CHARLES M. OBER, 4/20/50, Vice President -Vice President, T. Rowe Price;
Chartered Financial Analyst
BRIAN C. ROGERS, 6/27/55, Vice President -Director and Managing Director, T.
Rowe Price; Vice President, T. Rowe Price Trust Company; Chartered Financial
Analyst
Capital Opportunity Fund
* JOHN H. LAPORTE, JR., 7/26/45, Director and President -Director and
Managing Director, T. Rowe Price; Chartered Financial Analyst
* JAMES S. RIEPE, 6/25/43, Director and Vice President -Vice Chairman of the
Board, Managing Director, and Director, T. Rowe Price; Chairman of the Board,
T. Rowe Price Investment Services, Inc., T. Rowe Price Services, Inc., and T.
Rowe Price Retirement Plan Services, Inc.; Chairman of the Board, President,
and Trust Officer, T. Rowe Price Trust Company; Director, Price-Fleming and
General Re Corporation
* M. DAVID TESTA, 4/22/44, Director -Chairman of the Board and Director,
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, 11/25/62, Executive Vice President -Vice President, T. Rowe
Price
MARC L. BAYLIN, 11/17/67, Vice President -Vice President, T. Rowe Price;
formerly financial analyst, Rausher Pierce Refsnes; Chartered Financial
Analyst
BRIAN W.H. BERGHUIS, 12/12/58, Vice President -Managing Director, T. Rowe
Price; Chartered Financial Analyst
STEPHANIE C. CLANCY, 12/19/64, Vice President -Vice President, T. Rowe Price
LARRY J. PUGLIA, 8/25/60, Vice President -Managing Director, T. Rowe Price;
Chartered Financial Analyst
ROBERT W. SHARPS, 6/10/71, Vice President -Assistant Vice President, T. Rowe
Price; formerly Senior Consultant, KPMG Peat Marwick; Chartered Financial
Analyst
BRIAN D. STANSKY, 10/14/63, Vice President -Vice President, T. Rowe Price;
Chartered Financial Analyst
<PAGE>
Diversified Small-Cap Growth Fund
* JOHN H. LAPORTE, JR., 7/26/45, Director and Vice President -Director and
Managing Director, T. Rowe Price; Chartered Financial Analyst
* JAMES S. RIEPE, 6/25/43, Director and Vice President -Vice Chairman of the
Board, Managing Director, and Director, T. Rowe Price; Chairman of the Board,
T. Rowe Price Investment Services, Inc., T. Rowe Price Services, Inc., and T.
Rowe Price Retirement Plan Services, Inc.; Chairman of the Board, President,
and Trust Officer, T. Rowe Price Trust Company; Director, Price-Fleming and
General Re Corporation
* M. DAVID TESTA, 4/22/44, Director -Chairman of the Board and Director,
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, 5/7/58, President -Managing Director, T. Rowe Price; Vice
President, Price-Fleming and T. Rowe Price Trust Company; Chartered Financial
Analyst
MARC L. BAYLIN, 11/17/67, Vice President -Vice President, T. Rowe Price;
formerly financial analyst, Rausher Pierce Refsnes; Chartered Financial
Analyst
KRISTEN F. CULP, 9/28/62, Vice President -Vice President, T. Rowe Price and
T. Rowe Price Trust Company
DONALD J. PETERS, 7/3/59, Vice President -Vice President, T. Rowe Price;
formerly portfolio manager, Geewax Terker and Company
PAUL J. WOJCIK, 11/28/70, Vice President -Assistant Vice President, T. Rowe
Price; formerly Senior Programmer/Analyst, Fidelity Investments; Chartered
Financial Analyst
Dividend Growth Fund
* JAMES A.C. KENNEDY, 8/17/53, Director -Director and Managing Director, T.
Rowe Price; Chartered Financial Analyst
* JAMES S. RIEPE, 6/25/43, Director and Vice President -Vice Chairman of the
Board, Managing Director, and Director, T. Rowe Price; Chairman of the Board,
T. Rowe Price Investment Services, Inc., T. Rowe Price Services, Inc., and T.
Rowe Price Retirement Plan Services, Inc.; Chairman of the Board, President,
and Trust Officer, T. Rowe Price Trust Company; Director, Price-Fleming and
General Re Corporation
* M. DAVID TESTA, 4/22/44, Director -Chairman of the Board and Director,
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
WILLIAM J. STROMBERG, 3/10/60, President -Managing Director, T. Rowe Price;
Chartered Financial Analyst
BRIAN C. ROGERS, 6/27/55, Executive Vice President -Director and Managing
Director, T. Rowe Price; Vice President, T. Rowe Price Trust Company;
Chartered Financial Analyst
ARTHUR B. CECIL III, 9/15/42, Vice President -Vice President, T. Rowe Price;
Chartered Financial Analyst
STEPHANIE C. CLANCY, 12/19/64, Vice President -Vice President, T. Rowe Price
MICHAEL W. HOLTON, 9/25/68, Vice President -Vice President, T. Rowe Price;
formerly Research Analyst at Bowles, Hollowell, Conner and Company; Chartered
Financial Analyst
THOMAS J. HUBER, 9/23/66, Vice President -Vice President, T. Rowe Price;
formerly a Corporate Banking Officer with NationsBank; Chartered Financial
Analyst
DAVID M. LEE, 11/13/62, Vice President -Vice President, T. Rowe Price;
Chartered Financial Analyst; formerly Marketing Representative at IBM
DONALD J. PETERS, 7/3/59, Vice President -Vice President, T. Rowe Price;
formerly portfolio manager, Geewax Terker and Company
LARRY J. PUGLIA, 8/25/60, Vice President -Managing Director, T. Rowe Price;
Chartered Financial Analyst
DAVID J. WALLACK, 7/2/60, Vice President -Vice President, T. Rowe Price
<PAGE>
Equity Income Fund
* JAMES A.C. KENNEDY, 8/17/53, Trustee -Director and Managing Director, T.
Rowe Price; Chartered Financial Analyst
* JAMES S. RIEPE, 6/25/43, Trustee and Vice President -Vice Chairman of the
Board, Managing Director, and Director, T. Rowe Price; Chairman of the Board,
T. Rowe Price Investment Services, Inc., T. Rowe Price Services, Inc., and T.
Rowe Price Retirement Plan Services, Inc.; Chairman of the Board, President,
and Trust Officer, T. Rowe Price Trust Company; Director, Price-Fleming and
General Re Corporation
* M. DAVID TESTA, 4/22/44, Trustee -Chairman of the Board and Director,
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, 6/27/55, President -Director and Managing Director, T. Rowe
Price; Vice President, T. Rowe Price Trust Company; Chartered Financial
Analyst
STEPHEN W. BOESEL, 12/28/44, Vice President -Managing Director, T. Rowe
Price; Vice President, T. Rowe Price Trust Company and T. Rowe Price
Retirement Plan Services, Inc.
ANDREW M. BROOKS, 2/16/56, Vice President -Vice President, T. Rowe Price
ARTHUR B. CECIL III, 9/15/42, Vice President -Vice President, T. Rowe Price;
Chartered Financial Analyst
GIRI DEVULAPALLY, 11/18/67, Vice President -Employee, T. Rowe Price; formerly
Senior Consultant, Anderson Consulting
RICHARD P. HOWARD, 9/16/46, Vice President -Vice President, T. Rowe Price;
Chartered Financial Analyst
WILLIAM J. STROMBERG, 3/10/60, Vice President -Managing Director, T. Rowe
Price; Chartered Financial Analyst
MARK J. VASELKIV, 7/22/58, Vice President -Vice President, T. Rowe Price
Equity Index 500, Extended Equity Market Index, and Total Market Index Funds
* JAMES A.C. KENNEDY, 8/17/53, Director -Director and Managing Director, T.
Rowe Price; Chartered Financial Analyst
* JAMES S. RIEPE, 6/25/43, Director and Vice President -Vice Chairman of the
Board, Managing Director, and Director, T. Rowe Price; Chairman of the Board,
T. Rowe Price Investment Services, Inc., T. Rowe Price Services, Inc., and T.
Rowe Price Retirement Plan Services, Inc.; Chairman of the Board, President,
and Trust Officer, T. Rowe Price Trust Company; Director, Price-Fleming and
General Re Corporation
* M. DAVID TESTA, 4/22/44, Director -Chairman of the Board and Director,
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, 5/7/58, President -Managing Director, T. Rowe Price; Vice
President, Price-Fleming and T. Rowe Price Trust Company; Chartered Financial
Analyst
KRISTEN F. CULP, 9/28/62, Executive Vice President -Vice President, T. Rowe
Price and T. Rowe Price Trust Company
STEPHANIE C. CLANCY, 12/19/64, Vice President -Vice President, T. Rowe Price
WENDY R. DIFFENBAUGH, 10/2/53, Vice President -Assistant Vice President, T.
Rowe Price
RAYMOND A. MILLS, PHD, 12/3/60, Vice President -Assistant Vice President, T.
Rowe Price; formerly a Principal Systems Engineer at TASC, Inc.
MARY C. MUNOZ, 12/2/62, Vice President -Assistant Vice President, T. Rowe
Price
DONALD J. PETERS, 7/3/59, Vice President -Vice President, T. Rowe Price;
formerly portfolio manager, Geewax Terker and Company
<PAGE>
PAUL J. WOJCIK, 11/28/70, Vice President -Assistant Vice President, T. Rowe
Price; formerly Senior Programmer/Analyst, Fidelity Investments; Chartered
Financial Analyst
Financial Services Fund
* JAMES A.C. KENNEDY, 8/17/53, Director -Director and Managing Director, T.
Rowe Price; Chartered Financial Analyst
* JAMES S. RIEPE, 6/25/43, Director and Vice President -Vice Chairman of the
Board, Managing Director, and Director, T. Rowe Price; Chairman of the Board,
T. Rowe Price Investment Services, Inc., T. Rowe Price Services, Inc., and T.
Rowe Price Retirement Plan Services, Inc.; Chairman of the Board, President,
and Trust Officer, T. Rowe Price Trust Company; Director, Price-Fleming and
General Re Corporation
* M. DAVID TESTA, 4/22/44, Chairman of the Board -Chairman of the Board and
Director, 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, 8/25/60, President -Managing Director, T. Rowe Price;
Chartered Financial Analyst
STEPHEN W. BOESEL, 12/28/44, Vice President -Managing Director, T. Rowe
Price; Vice President, T. Rowe Price Trust Company and T. Rowe Price
Retirement Plan Services, Inc.
ANNA M. DOPKIN, 9/5/67, Vice President -Assistant Vice President, T. Rowe
Price; formerly 1996-1991, Analyst, Goldman Sachs; Chartered Financial
Analyst
ROBERT N. GENSLER, 10/18/57, Vice President -Vice President, T. Rowe Price
ROBERT J. MARCOTTE, 3/6/62, Vice President -Vice President, T. Rowe Price
ROBERT W. SHARPS, 6/10/71, Vice President -Assistant Vice President, T. Rowe
Price; formerly Senior Consultant, KPMG Peat Marwick; Chartered Financial
Analyst
WILLIAM J. STROMBERG, 3/10/60, Vice President -Managing Director, T. Rowe
Price; Chartered Financial Analyst
SUSAN J. KLEIN, 4/18/50, Assistant Vice President -Employee, T. Rowe Price
Growth & Income Fund
* JAMES A.C. KENNEDY, 8/17/53, Director -Director and Managing Director, T.
Rowe Price; Chartered Financial Analyst
* JAMES S. RIEPE, 6/25/43, Chairman of the Board -Vice Chairman of the Board,
Managing Director, and Director, T. Rowe Price; Chairman of the Board, T.
Rowe Price Investment Services, Inc., T. Rowe Price Services, Inc., and T.
Rowe Price Retirement Plan Services, Inc.; Chairman of the Board, President,
and Trust Officer, T. Rowe Price Trust Company; Director, Price-Fleming and
General Re Corporation
* M. DAVID TESTA, 4/22/44, Director -Chairman of the Board and Director,
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, 12/28/44, President -Managing Director, T. Rowe Price;
Vice President, T. Rowe Price Trust Company and T. Rowe Price Retirement Plan
Services, Inc.
ANDREW M. BROOKS, 2/16/56, Vice President -Vice President, T. Rowe Price
ARTHUR B. CECIL III, 9/15/42, Vice President -Vice President, T. Rowe Price;
Chartered Financial Analyst
KARA M. CHESEBY, 10/9/63, Vice President -Vice President, T. Rowe Price;
formerly Vice President, Legg Mason Wood Walker; Chartered Financial Analysis
DAVID M. LEE, 11/13/62, Vice President -Vice President, T. Rowe Price;
Chartered Financial Analyst; formerly Marketing Representative at IBM
<PAGE>
GREGORY A. MCCRICKARD, 10/19/58, Vice President -Managing Director, T. Rowe
Price; Vice President, T. Rowe Price Trust Company; Chartered Financial
Analyst
LARRY J. PUGLIA, 8/25/60, Vice President -Managing Director, T. Rowe Price;
Chartered Financial Analyst
BRIAN C. ROGERS, 6/27/55, Vice President -Director and Managing Director, T.
Rowe Price; Vice President, T. Rowe Price Trust Company; Chartered Financial
Analyst
ROBERT W. SMITH, 4/11/61, Vice President -Managing Director, T. Rowe Price;
Vice President, Price-Fleming
MARK J. VASELKIV, 7/22/58, Vice President -Vice President, T. Rowe Price
DAVID J. WALLACK, 7/2/60, Vice President -Vice President, T. Rowe Price
RICHARD T. WHITNEY, 5/7/58, Vice President -Managing Director, T. Rowe Price;
Vice President, Price-Fleming and T. Rowe Price Trust Company; Chartered
Financial Analyst
Growth Stock Fund
* JAMES A.C. KENNEDY, 8/17/53, Director and Vice President -Director and
Managing Director, T. Rowe Price; Chartered Financial Analyst
* JAMES S. RIEPE, 6/25/43, Director and Vice President -Vice Chairman of the
Board, Managing Director, and Director, T. Rowe Price; Chairman of the Board,
T. Rowe Price Investment Services, Inc., T. Rowe Price Services, Inc., and T.
Rowe Price Retirement Plan Services, Inc.; Chairman of the Board, President,
and Trust Officer, T. Rowe Price Trust Company; Director, Price-Fleming and
General Re Corporation
* M. DAVID TESTA, 4/22/44, Chairman of the Board -Chairman of the Board and
Director, 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, 4/11/61, President -Managing Director, T. Rowe Price; Vice
President, Price-Fleming
BRIAN W.H. BERGHUIS, 12/12/58, Vice President -Managing Director, T. Rowe
Price; Chartered Financial Analyst
ROBERT N. GENSLER, 10/18/57, Vice President -Vice President, T. Rowe Price
JILL L. HAUSER, 6/23/58, Vice President -Vice President, T. Rowe Price
THOMAS J. HUBER, 9/23/66, Vice President -Vice President, T. Rowe Price;
formerly a Corporate Banking Officer with NationsBank; Chartered Financial
Analyst
CHARLES A. MORRIS, 1/3/63, Vice President -Managing Director, T. Rowe Price;
Chartered Financial Analyst
D. JAMES PREY III, 11/26/59, Vice President -Vice President, T. Rowe Price
LARRY J. PUGLIA, 8/25/60, Vice President -Managing Director, T. Rowe Price;
Chartered Financial Analyst
CAROL G. BARTHA, 1/4/42, Assistant Vice President -Employee, T. Rowe Price
Health Sciences Fund
* JOHN H. LAPORTE, JR., 7/26/45, Director and President -Director and
Managing Director, T. Rowe Price; Chartered Financial Analyst
* JAMES S. RIEPE, 6/25/43, Director and Vice President -Vice Chairman of the
Board, Managing Director, and Director, T. Rowe Price; Chairman of the Board,
T. Rowe Price Investment Services, Inc., T. Rowe Price Services, Inc., and T.
Rowe Price Retirement Plan Services, Inc.; Chairman of the Board, President,
and Trust Officer, T. Rowe Price Trust Company; Director, Price-Fleming and
General Re Corporation
* M. DAVID TESTA, 4/22/44, Director -Chairman of the Board and Director,
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
<PAGE>
BRIAN D. STANSKY, 10/14/63, Executive Vice President -Vice President, T. Rowe
Price; Chartered Financial Analyst
KRIS H. JENNER, M.D., 2/5/62, Vice President -Vice President, T. Rowe Price;
formerly with the Laboratory of Biological Cancer, The Brigham & Women's
Hospital, Harvard Medical School
CHARLES A. MORRIS, 1/3/63, Vice President -Managing Director, T. Rowe Price;
Chartered Financial Analyst
CHARLES G. PEPIN, 4/23/66, Vice President -Vice President, T. Rowe Price
D. JAMES PREY III, 11/26/59, Vice President -Vice President, T. Rowe Price
DARRELL M. RILEY, 2/18/58, Vice President -Vice President, T. Rowe Price
BRIAN C. ROGERS, 6/27/55, Vice President -Director and Managing Director, T.
Rowe Price; Vice President, T. Rowe Price Trust Company; Chartered Financial
Analyst
Media & Telecommunications Fund
* JAMES S. RIEPE, 6/25/43, Chairman of the Board -Vice Chairman of the Board,
Managing Director, and Director, T. Rowe Price; Chairman of the Board, T.
Rowe Price Investment Services, Inc., T. Rowe Price Services, Inc., and T.
Rowe Price Retirement Plan Services, Inc.; Chairman of the Board, President,
and Trust Officer, T. Rowe Price Trust Company; Director, Price-Fleming and
General Re Corporation
* M. DAVID TESTA, 4/22/44, Director -Chairman of the Board and Director,
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 D. STANSKY, 10/14/63, President -Vice President, T. Rowe Price;
Chartered Financial Analyst
CHARLES A. MORRIS, 1/3/63, Executive Vice President -Managing Director, T.
Rowe Price; Chartered Financial Analyst
ROBERT N. GENSLER, 10/18/57, Vice President -Vice President, T. Rowe Price
SEEMA R. HINGORANI, 1/21/69, Vice President -Assistant Vice President, T.
Rowe Price; formerly Associate Equity Analyst, Donaldson, Lufkin & Jenrehe
D. JAMES PREY III, 11/26/59, Vice President -Vice President, T. Rowe Price
JOHN F. WAKEMAN, 11/25/62, Vice President -Vice President, T. Rowe Price
Mid-Cap Equity Growth Fund
* JAMES A.C. KENNEDY, 8/17/53, Director -Director and Managing Director, T.
Rowe Price; Chartered Financial Analyst
* JAMES S. RIEPE, 6/25/43, Chairman of the Board -Vice Chairman of the Board,
Managing Director, and Director, T. Rowe Price; Chairman of the Board, T.
Rowe Price Investment Services, Inc., T. Rowe Price Services, Inc., and T.
Rowe Price Retirement Plan Services, Inc.; Chairman of the Board, President,
and Trust Officer, T. Rowe Price Trust Company; Director, Price-Fleming and
General Re Corporation
* M. DAVID TESTA, 4/22/44, Director and President -Chairman of the Board and
Director, 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, 12/12/58, Executive Vice President -Managing Director,
T. Rowe Price; Chartered Financial Analyst
MARC L. BAYLIN, 11/17/67, Vice President -Vice President, T. Rowe Price;
formerly financial analyst, Rausher Pierce Refsnes; Chartered Financial
Analyst
ANNA M. DOPKIN, 9/5/67, Vice President -Assistant Vice President, T. Rowe
Price; formerly 1996-1991, Analyst, Goldman Sachs; Chartered Financial
Analyst
<PAGE>
ROBERT N. GENSLER, 10/18/57, Vice President -Vice President, T. Rowe Price
THOMAS J. HUBER, 9/23/66, Vice President -Vice President, T. Rowe Price;
formerly a Corporate Banking Officer with NationsBank; Chartered Financial
Analyst
ROBERT J. MARCOTTE, 3/6/62, Vice President -Vice President, T. Rowe Price
CHARLES A. MORRIS, 1/3/63, Vice President -Managing Director, T. Rowe Price;
Chartered Financial Analyst
JOHN F. WAKEMAN, 11/25/62, Vice President -Vice President, T. Rowe Price
Mid-Cap Growth Fund
* JAMES A.C. KENNEDY, 8/17/53, Director -Director and Managing Director, T.
Rowe Price; Chartered Financial Analyst
* JOHN H. LAPORTE, JR., 7/26/45, Director -Director and Managing Director, T.
Rowe Price; Chartered Financial Analyst
* JAMES S. RIEPE, 6/25/43, Chairman of the Board -Vice Chairman of the Board,
Managing Director, and Director, T. Rowe Price; Chairman of the Board, T.
Rowe Price Investment Services, Inc., T. Rowe Price Services, Inc., and T.
Rowe Price Retirement Plan Services, Inc.; Chairman of the Board, President,
and Trust Officer, T. Rowe Price Trust Company; Director, Price-Fleming and
General Re Corporation
BRIAN W.H. BERGHUIS, 12/12/58, President -Managing Director, T. Rowe Price;
Chartered Financial Analyst
MARC L. BAYLIN, 11/17/67, Vice President -Vice President, T. Rowe Price;
formerly financial analyst, Rausher Pierce Refsnes; Chartered Financial
Analyst
ANNA M. DOPKIN, 9/5/67, Vice President -Assistant Vice President, T. Rowe
Price; formerly 1996-1991, Analyst, Goldman Sachs; Chartered Financial
Analyst
ROBERT N. GENSLER, 10/18/57, Vice President -Vice President, T. Rowe Price
THOMAS J. HUBER, 9/23/66, Vice President -Vice President, T. Rowe Price;
formerly a Corporate Banking Officer with NationsBank; Chartered Financial
Analyst
ROBERT J. MARCOTTE, 3/6/62, Vice President -Vice President, T. Rowe Price
CHARLES A. MORRIS, 1/3/63, Vice President -Managing Director, T. Rowe Price;
Chartered Financial Analyst
JOHN F. WAKEMAN, 11/25/62, Vice President -Vice President, T. Rowe Price
Mid-Cap Value Fund
* JAMES A.C. KENNEDY, 8/17/53, Director and Vice President -Director and
Managing Director, T. Rowe Price; Chartered Financial Analyst
* JAMES S. RIEPE, 6/25/43, Director and Vice President -Vice Chairman of the
Board, Managing Director, and Director, T. Rowe Price; Chairman of the Board,
T. Rowe Price Investment Services, Inc., T. Rowe Price Services, Inc., and T.
Rowe Price Retirement Plan Services, Inc.; Chairman of the Board, President,
and Trust Officer, T. Rowe Price Trust Company; Director, Price-Fleming and
General Re Corporation
* M. DAVID TESTA, 4/22/44, Director -Chairman of the Board and Director,
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, 10/19/58, President -Managing Director, T. Rowe Price;
Vice President, T. Rowe Price Trust Company; Chartered Financial Analyst
PRESTON G. ATHEY, 7/17/49, Vice President -Managing Director, T. Rowe Price;
Vice President, T. Rowe Price Trust Company; Chartered Financial Analyst
HUGH M. EVANS III, 5/17/66, Vice President -Vice President, T. Rowe Price;
Chartered Financial Analyst
MARCY L. FISHER, 8/5/59, Vice President -Vice President, T. Rowe Price
<PAGE>
BRIAN C. ROGERS, 6/27/55, Vice President -Director and Managing Director, T.
Rowe Price; Vice President, T. Rowe Price Trust Company; Chartered Financial
Analyst
LAUREN A. ROMEO, 9/20/67, Vice President -Assistant Vice President, T. Rowe
Price; Chartered Financial Analyst
DAVID J. WALLACK, 7/2/60, Vice President -Vice President, T. Rowe Price
New America Growth Fund
* JOHN H. LAPORTE, JR., 7/26/45, Trustee and President -Director and Managing
Director, T. Rowe Price; Chartered Financial Analyst
* JAMES S. RIEPE, 6/25/43, Trustee and Vice President -Vice Chairman of the
Board, Managing Director, and Director, T. Rowe Price; Chairman of the Board,
T. Rowe Price Investment Services, Inc., T. Rowe Price Services, Inc., and T.
Rowe Price Retirement Plan Services, Inc.; Chairman of the Board, President,
and Trust Officer, T. Rowe Price Trust Company; Director, Price-Fleming and
General Re Corporation
* M. DAVID TESTA, 4/22/44, Trustee -Chairman of the Board and Director,
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, 12/12/58, Executive Vice President -Managing Director,
T. Rowe Price; Chartered Financial Analyst
MARC L. BAYLIN, 11/17/67, Vice President -Vice President, T. Rowe Price;
formerly financial analyst, Rausher Pierce Refsnes; Chartered Financial
Analyst
KARA M. CHESEBY, 10/9/63, Vice President -Vice President, T. Rowe Price;
formerly Vice President, Legg Mason Wood Walker; Chartered Financial Analysis
ROBERT N. GENSLER, 10/18/57, Vice President -Vice President, T. Rowe Price
SEEMA R. HINGORANI, 1/21/69, Vice President -Assistant Vice President, T.
Rowe Price; formerly Associate Equity Analyst, Donaldson, Lufkin & Jenrehe
THOMAS J. HUBER, 9/23/66, Vice President -Vice President, T. Rowe Price;
formerly a Corporate Banking Officer with NationsBank; Chartered Financial
Analyst
CHARLES G. PEPIN, 4/23/66, Vice President -Vice President, T. Rowe Price
BRIAN D. STANSKY, 10/14/63, Vice President -Vice President, T. Rowe Price;
Chartered Financial Analyst
JOHN F. WAKEMAN, 11/25/62, Vice President -Vice President, T. Rowe Price
New Era Fund
* JAMES A.C. KENNEDY, 8/17/53, Director and Vice President -Director and
Managing Director, T. Rowe Price; Chartered Financial Analyst
* JAMES S. RIEPE, 6/25/43, Director and Vice President -Vice Chairman of the
Board, Managing Director, and Director, T. Rowe Price; Chairman of the Board,
T. Rowe Price Investment Services, Inc., T. Rowe Price Services, Inc., and T.
Rowe Price Retirement Plan Services, Inc.; Chairman of the Board, President,
and Trust Officer, T. Rowe Price Trust Company; Director, Price-Fleming and
General Re Corporation
* M. DAVID TESTA, 4/22/44, Director -Chairman of the Board and Director,
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, 4/20/50, President -Vice President, T. Rowe Price; Chartered
Financial Analyst
DAVID J. WALLACK, 7/2/60, Executive Vice President -Vice President, T. Rowe
Price
HUGH M. EVANS III, 5/17/66, Vice President -Vice President, T. Rowe Price;
Chartered Financial Analyst
RICHARD P. HOWARD, 9/16/46, Vice President -Vice President, T. Rowe Price;
Chartered Financial Analyst
<PAGE>
DAVID M. LEE, 11/13/62, Vice President -Vice President, T. Rowe Price;
Chartered Financial Analyst; formerly Marketing Representative at IBM
ROBERT J. MARCOTTE, 3/6/62, Vice President -Vice President, T. Rowe Price
GEORGE A. ROCHE, 7/6/41, Vice President -President, Director, Chairman of the
Board, and Managing Director, T. Rowe Price; Director, Price-Fleming and T.
Rowe Price Retirement Plan Services, Inc.
New Horizons Fund
* JOHN H. LAPORTE, JR., 7/26/45, Director and President -Director and
Managing Director, T. Rowe Price; Chartered Financial Analyst
* JAMES S. RIEPE, 6/25/43, Director and Vice President -Vice Chairman of the
Board, Managing Director, and Director, T. Rowe Price; Chairman of the Board,
T. Rowe Price Investment Services, Inc., T. Rowe Price Services, Inc., and T.
Rowe Price Retirement Plan Services, Inc.; Chairman of the Board, President,
and Trust Officer, T. Rowe Price Trust Company; Director, Price-Fleming and
General Re Corporation
* M. DAVID TESTA, 4/22/44, Director -Chairman of the Board and Director,
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, 7/17/49, Vice President -Managing Director, T. Rowe Price;
Vice President, T. Rowe Price Trust Company; Chartered Financial Analyst
MARC L. BAYLIN, 11/17/67, Vice President -Vice President, T. Rowe Price;
formerly financial analyst, Rausher Pierce Refsnes; Chartered Financial
Analyst
BRIAN W.H. BERGHUIS, 12/12/58, Vice President -Managing Director, T. Rowe
Price; Chartered Financial Analyst
ANNA M. DOPKIN, 9/5/67, Vice President -Assistant Vice President, T. Rowe
Price; formerly 1996-1991, Analyst, Goldman Sachs; Chartered Financial
Analyst
MARCY L. FISHER, 8/5/59, Vice President -Vice President, T. Rowe Price
ROBERT N. GENSLER, 10/18/57, Vice President -Vice President, T. Rowe Price
JILL L. HAUSER, 6/23/58, Vice President -Vice President, T. Rowe Price
THOMAS J. HUBER, 9/23/66, Vice President -Vice President, T. Rowe Price;
formerly a Corporate Banking Officer with NationsBank; Chartered Financial
Analyst
KRIS H. JENNER, M.D., 2/5/62, Vice President -Vice President, T. Rowe Price;
formerly with the Laboratory of Biological Cancer, The Brigham & Women's
Hospital, Harvard Medical School
JOSEPH M. MILANO, 9/14/72, Vice President -Assistant Vice President, T. Rowe
Price; formerly 1996-1994 Research Assistant, Brookings Institution
CHARLES A. MORRIS, 1/3/63, Vice President -Managing Director, T. Rowe Price;
Chartered Financial Analyst
CHARLES G. PEPIN, 4/23/66, Vice President -Vice President, T. Rowe Price
DARRELL M. RILEY, 2/18/58, Vice President -Vice President, T. Rowe Price
MARK R. SCHLARBAUM, 12/23/69, Vice President -Vice President, T. Rowe Price
MICHAEL F. SOLA, 7/21/69, Vice President -Vice President, T. Rowe Price;
formerly Systems Analyst/ Programmer at SRA Corporation; Chartered Financial
Analyst
BRIAN D. STANSKY, 10/14/63, Vice President -Vice President, T. Rowe Price;
Chartered Financial Analyst
JOHN F. WAKEMAN, 11/25/62, Vice President -Vice President, T. Rowe Price
FRANCIES W. HAWKS, 2/2/44, Assistant Vice President -Assistant Vice
President, T. Rowe Price
<PAGE>
Real Estate Fund
* JAMES A.C. KENNEDY, 8/17/53, Director and Vice President -Director and
Managing Director, T. Rowe Price; Chartered Financial Analyst
* JAMES S. RIEPE, 6/25/43, Director and Vice President -Vice Chairman of the
Board, Managing Director, and Director, T. Rowe Price; Chairman of the Board,
T. Rowe Price Investment Services, Inc., T. Rowe Price Services, Inc., and T.
Rowe Price Retirement Plan Services, Inc.; Chairman of the Board, President,
and Trust Officer, T. Rowe Price Trust Company; Director, Price-Fleming and
General Re Corporation
* M. DAVID TESTA, 4/22/44, Director -Chairman of the Board and Director,
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
WILLIAM J. STROMBERG, 3/10/60, President -Managing Director, T. Rowe Price;
Chartered Financial Analyst
DAVID M. LEE, 11/13/62, Executive Vice President -Vice President, T. Rowe
Price; Chartered Financial Analyst; formerly Marketing Representative at IBM
STEPHEN W. BOESEL, 12/28/44, Vice President -Managing Director, T. Rowe
Price; Vice President, T. Rowe Price Trust Company and T. Rowe Price
Retirement Plan Services, Inc.
ANNA M. DOPKIN, 9/5/67, Vice President -Assistant Vice President, T. Rowe
Price; formerly 1996-1991, Analyst, Goldman Sachs; Chartered Financial
Analyst
CHARLES M. OBER, 4/20/50, Vice President -Vice President, T. Rowe Price;
Chartered Financial Analyst
BRIAN C. ROGERS, 6/27/55, Vice President -Director and Managing Director, T.
Rowe Price; Vice President, T. Rowe Price Trust Company; Chartered Financial
Analyst
Science & Technology Fund
* JOHN H. LAPORTE, JR., 7/26/45, Chairman of the Board -Director and Managing
Director, T. Rowe Price; Chartered Financial Analyst
* JAMES S. RIEPE, 6/25/43, Director and Vice President -Vice Chairman of the
Board, Managing Director, and Director, T. Rowe Price; Chairman of the Board,
T. Rowe Price Investment Services, Inc., T. Rowe Price Services, Inc., and T.
Rowe Price Retirement Plan Services, Inc.; Chairman of the Board, President,
and Trust Officer, T. Rowe Price Trust Company; Director, Price-Fleming and
General Re Corporation
* M. DAVID TESTA, 4/22/44, Director -Chairman of the Board and Director,
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, 1/3/63, President -Managing Director, T. Rowe Price;
Chartered Financial Analyst
MARC L. BAYLIN, 11/17/67, Vice President -Vice President, T. Rowe Price;
formerly financial analyst, Rausher Pierce Refsnes; Chartered Financial
Analyst
MARCY L. FISHER, 8/5/59, Vice President -Vice President, T. Rowe Price
ROBERT N. GENSLER, 10/18/57, Vice President -Vice President, T. Rowe Price
STEPHEN C. JANSEN, 12/12/68, Vice President -Assistant Vice President, T.
Rowe Price; formerly an Investment Analyst at Schroder & Co.
JILL L. HAUSER, 6/23/58, Vice President -Vice President, T. Rowe Price
D. JAMES PREY III, 11/26/59, Vice President -Vice President, T. Rowe Price
MICHAEL F. SOLA, 7/21/69, Vice President -Vice President, T. Rowe Price;
formerly Systems Analyst/ Programmer at SRA Corporation; Chartered Financial
Analyst
BRIAN D. STANSKY, 10/14/63, Vice President -Vice President, T. Rowe Price;
Chartered Financial Analyst
<PAGE>
Small-Cap Stock Fund
* JOHN H. LAPORTE, JR., 7/26/45, Chairman of the Board -Director and Managing
Director, T. Rowe Price; Chartered Financial Analyst
* JAMES S. RIEPE, 6/25/43, Director and Vice President -Vice Chairman of the
Board, Managing Director, and Director, T. Rowe Price; Chairman of the Board,
T. Rowe Price Investment Services, Inc., T. Rowe Price Services, Inc., and T.
Rowe Price Retirement Plan Services, Inc.; Chairman of the Board, President,
and Trust Officer, T. Rowe Price Trust Company; Director, Price-Fleming and
General Re Corporation
* M. DAVID TESTA, 4/22/44, Director -Chairman of the Board and Director,
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, 10/19/58, President -Managing Director, T. Rowe Price;
Vice President, T. Rowe Price Trust Company; Chartered Financial Analyst
PRESTON G. ATHEY, 7/17/49, Vice President -Managing Director, T. Rowe Price;
Vice President, T. Rowe Price Trust Company; Chartered Financial Analyst
HUGH M. EVANS III, 5/17/66, Vice President -Vice President, T. Rowe Price;
Chartered Financial Analyst
MARCY L. FISHER, 8/5/59, Vice President -Vice President, T. Rowe Price
JAMES A.C. KENNEDY, 8/17/53, Vice President -Director and Managing Director,
T. Rowe Price; Chartered Financial Analyst
JOSEPH M. MILANO, 9/14/72, Vice President -Assistant Vice President, T. Rowe
Price; formerly 1996-1994 Research Assistant, Brookings Institution
CHARLES G. PEPIN, 4/23/66, Vice President -Vice President, T. Rowe Price
LAUREN A. ROMEO, 9/20/67, Vice President -Assistant Vice President, T. Rowe
Price; Chartered Financial Analyst
BRIAN D. STANSKY, 10/14/63, Vice President -Vice President, T. Rowe Price;
Chartered Financial Analyst
RICHARD T. WHITNEY, 5/7/58, Vice President -Managing Director, T. Rowe Price;
Vice President, Price-Fleming and T. Rowe Price Trust Company; Chartered
Financial Analyst
Small-Cap Value Fund
* JOHN H. LAPORTE, JR., 7/26/45, Chairman of the Board -Director and Managing
Director, T. Rowe Price; Chartered Financial Analyst
* JAMES S. RIEPE, 6/25/43, Director and Vice President -Vice Chairman of the
Board, Managing Director, and Director, T. Rowe Price; Chairman of the Board,
T. Rowe Price Investment Services, Inc., T. Rowe Price Services, Inc., and T.
Rowe Price Retirement Plan Services, Inc.; Chairman of the Board, President,
and Trust Officer, T. Rowe Price Trust Company; Director, Price-Fleming and
General Re Corporation
* M. DAVID TESTA, 4/22/44, Director -Chairman of the Board and Director,
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, 7/17/49, President -Managing Director, T. Rowe Price; Vice
President, T. Rowe Price Trust Company; Chartered Financial Analyst
HUGH M. EVANS III, 5/17/66, Vice President -Vice President, T. Rowe Price;
Chartered Financial Analyst
ROBERT J. MARCOTTE, 3/6/62, Vice President -Vice President, T. Rowe Price
GREGORY A. MCCRICKARD, 10/19/58, Vice President -Managing Director, T. Rowe
Price; Vice President, T. Rowe Price Trust Company; Chartered Financial
Analyst
<PAGE>
JOSEPH M. MILANO, 9/14/72, Vice President -Assistant Vice President, T. Rowe
Price; formerly 1996-1994 Research Assistant, Brookings Institution
LAUREN A. ROMEO, 9/20/67, Vice President -Assistant Vice President, T. Rowe
Price; Chartered Financial Analyst
FRANCIES W. HAWKS, 2/2/44, Assistant Vice President -Assistant Vice
President, T. Rowe Price
Value Fund
* JAMES A.C. KENNEDY, 8/17/53, Director -Director and Managing Director, T.
Rowe Price; Chartered Financial Analyst
* JAMES S. RIEPE, 6/25/43, Director and Vice President -Vice Chairman of the
Board, Managing Director, and Director, T. Rowe Price; Chairman of the Board,
T. Rowe Price Investment Services, Inc., T. Rowe Price Services, Inc., and T.
Rowe Price Retirement Plan Services, Inc.; Chairman of the Board, President,
and Trust Officer, T. Rowe Price Trust Company; Director, Price-Fleming and
General Re Corporation
* M. DAVID TESTA, 4/22/44, Director -Chairman of the Board and Director,
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, 6/27/55, President -Director and Managing Director, T. Rowe
Price; Vice President, T. Rowe Price Trust Company; Chartered Financial
Analyst
STEPHEN W. BOESEL, 12/28/44, Vice President -Managing Director, T. Rowe
Price; Vice President, T. Rowe Price Trust Company and T. Rowe Price
Retirement Plan Services, Inc.
KARA M. CHESEBY, 10/9/63, Vice President -Vice President, T. Rowe Price;
formerly Vice President, Legg Mason Wood Walker; Chartered Financial Analysis
STEPHANIE C. CLANCY, 12/19/64, Vice President -Vice President, T. Rowe Price
RICHARD P. HOWARD, 9/16/46, Vice President -Vice President, T. Rowe Price;
Chartered Financial Analyst
ROBERT W. SMITH, 4/11/61, Vice President -Managing Director, T. Rowe Price;
Vice President, Price-Fleming
DAVID J. WALLACK, 7/2/60, Vice President -Vice President, T. Rowe Price
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 Total Compensation from Fund and
Position Fund(a) Fund Complex Paid to Directors/ Trustees(b)
- -------------------------------- -------------------------------------------- -----------
- --------------------------------------------------------------------------------
--------------------------------------
----------------------------------------------------
<C> <S> <S>
Balanced Fund
Donald W. Dick, Jr., Director $1,529 $82,000
David K. Fagin, Director 1,919 65,000
Hanne M. Merriman, Director 1,919 65,000
Hubert D. Vos, Director 1,919 66,000
Paul M. Wythes, Director 1,529 80,000
- ------------------------------------------------------------------------------------------------------------------------------------
Blue Chip Growth Fund
Donald W. Dick, Jr., Director $2,119 $82,000
David K. Fagin, Director 2,956 65,000
Hanne M. Merriman, Director 2,956 65,000
Hubert D. Vos, Director 2,956 66,000
Paul M. Wythes, Director 2,119 80,000
- ------------------------------------------------------------------------------------------------------------------------------------
Capital Appreciation Fund
Donald W. Dick, Jr., Director $1,396 $82,000
David K. Fagin, Director 1,690 65,000
Hanne M. Merriman, Director 1,690 65,000
Hubert D. Vos, Director 1,690 66,000
Paul M. Wythes, Director 1,396 80,000
- ------------------------------------------------------------------------------------------------------------------------------------
Capital Opportunity Fund
Donald W. Dick, Jr., Director $1,057 $82,000
David K. Fagin, Director 1,089 65,000
Hanne M. Merriman, Director 1,089 65,000
Hubert D. Vos, Director 1,089 66,000
Paul M. Wythes, Director 1,057 80,000
- ------------------------------------------------------------------------------------------------------------------------------------
Diversified Small-Cap Growth Fund
Donald W. Dick, Jr., Director $1,040 $82,000
David K. Fagin, Director 1,057 65,000
Hanne M. Merriman, Director 1,057 65,000
Hubert D. Vos, Director 1,057 66,000
Paul M. Wythes, Director 1,037 80,000
- ------------------------------------------------------------------------------------------------------------------------------------
Dividend Growth Fund
Donald W. Dick, Jr., Director $1,378 $82,000
David K. Fagin, Director 1,657 65,000
Hanne M. Merriman, Director 1,657 65,000
Hubert D. Vos, Director 1,657 66,000
Paul M. Wythes, Director 1,378 80,000
- ------------------------------------------------------------------------------------------------------------------------------------
Equity Income Fund
Donald W. Dick, Jr., Trustee $5,901 $82,000
David K. Fagin, Trustee 9,017 65,000
Hanne M. Merriman, Trustee 9,017 65,000
Hubert D. Vos, Trustee 9,017 66,000
Paul M. Wythes, Trustee 5,901 80,000
- ------------------------------------------------------------------------------------------------------------------------------------
Equity Index 500 Fund
Donald W. Dick, Jr., Director $1,908 $82,000
David K. Fagin, Director 2,584 65,000
Hanne M. Merriman, Director 2,584 65,000
Hubert D. Vos, Director 2,584 66,000
Paul M. Wythes, Director 1,908 80,000
- ------------------------------------------------------------------------------------------------------------------------------------
Extended Equity Market Index Fund
Donald W. Dick, Jr., Director $914 $82,000
David K. Fagin, Director 920 65,000
Hanne M. Merriman, Director 920 65,000
Hubert D. Vos, Director 920 66,000
Paul M. Wythes, Director 914 80,000
- ------------------------------------------------------------------------------------------------------------------------------------
Financial Services Fund
Donald W. Dick, Jr., Director $1,037 $82,000
David K. Fagin, Director 1,049 65,000
Hanne M. Merriman, Director 1,049 65,000
Hubert D. Vos, Director 1,049 66,000
Paul M. Wythes, Director 1,037 80,000
- ------------------------------------------------------------------------------------------------------------------------------------
Growth & Income Fund
Donald W. Dick, Jr., Director $2,298 $82,000
David K. Fagin, Director 3,276 65,000
Hanne M. Merriman, Director 3,276 65,000
Hubert D. Vos, Director 3,276 66,000
Paul M. Wythes, Director 2,298 80,000
- ------------------------------------------------------------------------------------------------------------------------------------
Growth Stock Fund
Donald W. Dick, Jr., Director $2,609 $82,000
David K. Fagin, Director 3,825 65,000
Hanne M. Merriman, Director 3,825 65,000
Hubert D. Vos, Director 3,825 66,000
Paul M. Wythes, Director 2,609 80,000
- ------------------------------------------------------------------------------------------------------------------------------------
Health Sciences Fund
Donald W. Dick, Jr., Director $1,025 $82,000
David K. Fagin, Director 1,037 65,000
Hanne M. Merriman, Director 1,037 65,000
Hubert D. Vos, Director 1,037 66,000
Paul M. Wythes, Director 1,025 80,000
- ------------------------------------------------------------------------------------------------------------------------------------
Media & Telecommunications Fund
Donald W. Dick, Jr., Director $1,044 $82,000
David K. Fagin, Director 1,045 65,000
Hanne M. Merriman, Director 1,045 65,000
Hubert D. Vos, Director 1,045 66,000
Paul M. Wythes, Director 1,044 80,000
- ------------------------------------------------------------------------------------------------------------------------------------
Mid-Cap Equity Growth Fund
Donald W. Dick, Jr., Director $1,095 $82,000
David K. Fagin, Director 1,157 65,000
Hanne M. Merriman, Director 1,157 65,000
Hubert D. Vos, Director 1,157 66,000
Paul M. Wythes, Director 1,095 80,000
- ------------------------------------------------------------------------------------------------------------------------------------
Mid-Cap Growth Fund
Donald W. Dick, Jr., Director $1,874 $82,000
David K. Fagin, Director 2,525 65,000
Hanne M. Merriman, Director 2,525 65,000
Hubert D. Vos, Director 2,525 66,000
Paul M. Wythes, Director 1,874 80,000
- ------------------------------------------------------------------------------------------------------------------------------------
Mid-Cap Value Fund
Donald W. Dick, Jr., Director $1,046 $82,000
David K. Fagin, Director 1,073 65,000
Hanne M. Merriman, Director 1,073 65,000
Hubert D. Vos, Director 1,073 66,000
Paul M. Wythes, Director 1,046 80,000
- ------------------------------------------------------------------------------------------------------------------------------------
New America Growth Fund
Donald W. Dick, Jr., Trustee $1,694 $82,000
David K. Fagin, Trustee 2,211 65,000
Hanne M. Merriman, Trustee 2,211 65,000
Hubert D. Vos, Trustee 2,211 66,000
Paul M. Wythes, Trustee 1,694 80,000
- ------------------------------------------------------------------------------------------------------------------------------------
New Era Fund
Donald W. Dick, Jr., Director $1,481 $82,000
David K. Fagin, Director 1,840 65,000
Hanne M. Merriman, Director 1,840 65,000
Hubert D. Vos, Director 1,840 66,000
Paul M. Wythes, Director 1,481 80,000
- ------------------------------------------------------------------------------------------------------------------------------------
New Horizons Fund
Donald W. Dick, Jr., Director $2,829 $82,000
David K. Fagin, Director 4,216 65,000
Hanne M. Merriman, Director 4,216 65,000
Hubert D. Vos, Director 4,216 66,000
Paul M. Wythes, Director 2,829 80,000
- ------------------------------------------------------------------------------------------------------------------------------------
Real Estate Fund
Donald W. Dick, Jr., Director $1,023 $82,000
David K. Fagin, Director 1,032 65,000
Hanne M. Merriman, Director 1,032 65,000
Hubert D. Vos, Director 1,032 66,000
Paul M. Wythes, Director 1,023 80,000
- ------------------------------------------------------------------------------------------------------------------------------------
Science & Technology Fund
Donald W. Dick, Jr., Director $2,323 $82,000
David K. Fagin, Director 3,321 65,000
Hanne M. Merriman, Director 3,321 65,000
Hubert D. Vos, Director 3,321 66,000
Paul M. Wythes, Director 2,323 80,000
- ------------------------------------------------------------------------------------------------------------------------------------
Small-Cap Stock Fund
Donald W. Dick, Jr., Director $1,369 $82,000
David K. Fagin, Director 1,638 65,000
Hanne M. Merriman, Director 1,638 65,000
Hubert D. Vos, Director 1,638 66,000
Paul M. Wythes, Director 1,369 80,000
- ------------------------------------------------------------------------------------------------------------------------------------
Small-Cap Value Fund
Donald W. Dick, Jr., Director $1,722 $82,000
David K. Fagin, Director 2,266 65,000
Hanne M. Merriman, Director 2,266 65,000
Hubert D. Vos, Director 2,266 66,000
Paul M. Wythes, Director 1,722 80,000
- ------------------------------------------------------------------------------------------------------------------------------------
Total Market Equity Index Fund
Donald W. Dick, Jr., Director $920 $82,000
David K. Fagin, Director 927 65,000
Hanne M. Merriman, Director 927 65,000
Hubert D. Vos, Director 927 66,000
Paul M. Wythes, Director 920 80,000
- ------------------------------------------------------------------------------------------------------------------------------------
Value Fund
Donald W. Dick, Jr., Director $1,282 $82,000
David K. Fagin, Director 1,489 65,000
Hanne M. Merriman, Director 1,489 65,000
Hubert D. Vos, Director 1,489 66,000
Paul M. Wythes, Director 1,282 80,000
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<PAGE>
<PAGE>
<PAGE>
(a) Amounts in this column are based on accrued compensation for calendar
year 1998.
(b) Amounts in this column are based on compensation received from January
1, 1998, to December 31, 1998. The T. Rowe Price complex included 87 funds
as of December 31, 1998.
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/trustees of the
Fund, as a group, owned less than 1% of the outstanding shares of the Fund.
As of April 1, 1999, the following shareholders beneficially owned more than
5% of the outstanding shares of the Fund:
Balanced Fund: T. Rowe Price Retirement Plan Services Inc., Fred Meyer Inc.
401k Sav Plan Fred Plan #105054, New Business Group Conv Asset #68, P.O. Box
17215, Baltimore, Maryland 21297-1215;
<PAGE>
Blue Chip Growth Fund: T. Rowe Price Retirement Plan Services TR Blue Chip
Growth Fund, Attn.: Asset Reconciliations, P.O. Box 17215, Baltimore,
Maryland 21297-1215; Fidelity Investments Institutional Operations Co., FIIOC
as Agent for Merck & Co. Inc. #83169, 100 Magellan Way (KW1C), Covington,
Kentucky 41015-1999;
Financial Services Fund: T. Rowe Price Retirement Plan Services Inc., New
Business Group for #117, P.O. Box 17215, Baltimore, Maryland 21297-1215;
Health Sciences Fund: T. Rowe Price Retirement Plan Services Inc. Co. Omnibus
Plan #Omni Plan Installation Team for #114, P.O. Box 17215, Baltimore,
Maryland 21297-1215;
Mid-Cap Equity Growth Fund: Atlantic Trust Company NA, Attn.: Nominee
Account, 100 Federal Street, 37th Floor, Boston, Massachusetts 02110-1802; St
Joe Co. Salaried Pension Plan, 1650 Prudential Drive, Ste. 400, Jacksonville,
Florida 32207-8166; Pell Rudman Trust Co. NA, Nominee Acct., Attn.: Mutual
Funds, 100 Federal St., 37th Fl., Boston Massachusetts 02110-1802; Roland &
Company c/o Mercantile Bank of St. Louis Trust Securities Unit 17-1, P.O. Box
387, St. Louis, Missouri 63166-0387; Trustmark National Bank TR FBO Various
Accounts-RR 248 Capital St., Jackson, Mississippi 39201-2503;
New Horizons Fund: The City of New York Deferred Compensation Plan, IRC
Section 457 Plan, 40 Rector St., 3rd Fl., New York, New York 10006-1705;
Small-Cap Stock Fund: Sigler & Co. C F Smithsonian Int. Wellington Trust Co.
RD 79866-77, Chase Manhattan Bank, Attn.: Hazel Drinkard, 770 Broadway, 10th
Fl., New York, New York 10003-9522;
Blue Chip Growth, Growth & Income, Growth Stock, Mid-Cap Value, New Era, and
New Horizons 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;
Dividend Growth, Mid-Cap Growth, New Era, Science & Technology, Small-Cap
Stock, and Value Funds: Charles Schwab & Co. Inc., Reinvest. Account, Attn.:
Mutual Fund Dept., 101 Montgomery St., San Francisco, California 94104-4122;
Growth & Income and Science & Technology Funds: Manulife Financial USA, 200
Bloor St East NT3, Toronto, Ontario Canada M4WIE5, Attn.: Rosie Chuck,
Pension Accounting.
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 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/trustees, and committee members of the Fund without cost to the
Fund.
The Management Agreement also provides that T. Rowe Price, its
directors/trustees, 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.
<PAGE>
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 Price 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% Next $40
billion
---------------------------------------------------------------------------
0.390% Next $1 billion 0.330% Next $10 billion 0.295% Thereafter
---------------------------------------------------------------------------
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 Investment Services, (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 are listed in the following chart:
<TABLE>
<CAPTION>
<S> <C>
Balanced Fund 0.15%
Blue Chip Growth Fund 0.30%
Capital Appreciation Fund 0.30%
Capital Opportunity Fund 0.35%
Diversified Small-Cap Growth Fund 0.35%
Dividend Growth Fund 0.20%
Equity Income Fund 0.25%
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 0.30%
Small-Cap Stock Fund 0.45%
Science & Technology Fund 0.35%
Small-Cap Value Fund 0.35%
Value Fund 0.35%
</TABLE>
<PAGE>
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 1998 1997 1996
---- ---- ---- ----
<S> <C> <C> <C>
Balanced $ 6,809,000 $ 5,317,000 $ 3,765,000
Blue Chip Growth 19,869,000 8,706,000 1,924,000
Capital Appreciation 3,939,000 3,861,000 4,218,000
Capital Opportunity 991,000 899,000 890,000
Diversified Small-Cap Growth 325,000 81,000 (a)
Dividend Growth 5,482,000 2,659,000 754,000
Equity Income 77,394,000 60,406,000 37,762,000
Equity Index 500 4,169,000 2,516,000 925,000
Extended Equity Market Index 0 (a) (a)
Financial Services 1,582,000 636,000 (b)
Growth & Income 20,258,000 17,390,000 12,048,000
Growth Stock 25,573,000 22,078,000 17,848,000
Health Sciences 1,926,000 1,811,000 750,000
Media & Telecommunications ( c) 1,301,000 1,783,000 3,056,000
Mid-Cap Equity Growth 633,000 117,000 (b)
Mid-Cap Growth 16,692,000 8,533,000 4,390,000
Mid-Cap Value 1,596,000 728,000 22,000
New America Growth 12,703,000 10,541,000 8,648,000
New Era 7,211,000 9,144,000 7,559,000
New Horizons 33,743,000 31,439,000 25,875,000
Real Estate (b) (b) (a)
Science & Technology 24,865,000 24,246,000 19,792,000
Small-Cap Stock 7,791,000 4,405,000 2,619,000
Small-Cap Value 13,021,000 11,594,000 8,187,000
Total Equity Market Index 0 (a) (a)
Value 5,176,000 2,597,000 748,000
- -----------------------------------------------------------------------------------------------------
</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.
<PAGE>
For Capital Opportunity, Diversified Small-Cap Growth, Dividend Growth,
Equity Index 500, Financial Services, Health Sciences, Mid-Cap Equity 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 Reimbursement
Fund Limitation Period ------- -------------
---- ----------------- Ratio Date
----- ----
Limitation
----------
<S> <S> <C> <S>
January 1, 1999 -
Diversified Small-Cap Growth(a) December 31, 2000 1.25% December 31, 2002
January 1, 1998 -
Equity Index 500(b) December 31, 1999 0.40% December 31, 2001
September 30, 1996 -
Financial Services December 31, 1998 1.25% December 31, 2000
December 31, 1995 -
Health Sciences December 31, 1997 1.35% December 31, 1999
July 31, 1996 -
Mid-Cap Equity Growth December 31, 1997 0.85% December 31, 1999
June 28, 1996 -
Mid-Cap Value December 31, 1997 1.25% December 31, 1999
Real Estate October 31, 1997 - 1.00% December 31, 2001
December 31, 1999
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The Diversified Small-Cap Growth Fund previously operated under a
1.25% limitation that expired December 31, 1998. The reimbursement
period for this limitation extends through December 31, 2000.
(b) 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 Capital Opportunity Fund's expense limitation that expired on
December 31, 1996, $72,000 of previously unaccrued management fees and
expenses were repaid for the year ended December 31, 1998. Additionally,
$22,000 of management fees were permanently waived as of December 31, 1998.
Pursuant to the Diversified Small-Cap Growth Fund's current expense
limitation, $146,000 of management fees were not accrued for the year ended
December 31, 1998.
Pursuant to the Equity Index 500 Fund's previous expenses limitation,
$283,000 of management fees were not accrued by the Fund for the year ended
December 31, 1997. Additionally, $370,000 of unaccrued 1996 management fees
are subject to reimbursement through December 31, 1999.
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, 1997 and $26,000 of unaccrued fees and expenses are subject to
reimbursement through December 31, 2000.
Pursuant to the Mid-Cap Equity Growth Fund's current expense limitation,
$84,000 of previously unaccrued management fees were repaid by the Fund for
the year ended December 31, 1998, and $32,000 remains unaccrued from prior
periods and subject to reimbursement through December 31, 1999.
Pursuant to the Mid-Cap Value Fund's current expense limitation, $71,000 of
previously unaccrued management fees were repaid by the Fund for the year
ended December 31, 1997 and $7,000 remains subject to reimbursement through
December 31, 1999.
<PAGE>
Pursuant to the Real Estate Fund's current expense limitation, $5,000 of
management fees were not accrued by the Fund for the year ended December 31,
1997, and $18,000 of other expenses were borne by the Manager.
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.
Blue Chip Growth, 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, 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").
Each Agreement provides 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 that 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.
Management Related Services
As noted above, 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.
T. Rowe Price Services, Inc., a wholly owned subsidiary of T. Rowe Price,
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. Additionally, T. Rowe Price, under a separate
agreement with the Funds, provides accounting services to the Funds.
The Funds paid the expenses shown in the following table for the fiscal year
ended December 31, 1998, to T. Rowe Price and its affiliates.
<PAGE>
<TABLE>
<CAPTION>
Transfer Agent and Retirement Accounting
Fund Shareholder Services Subaccounting Services
---- -------------------- Services --------
--------
<S> <C> <C> <C>
Balanced $ 536,000 $ 2,857,000 $ 94,000
Blue Chip Growth 4,052,000 2,953,000 62,000
Capital Appreciation 780,000 1,150,000 87,000
Capital Opportunity 290,000 23,000 62,000
Diversified Small-Cap
Growth 246,000 - 62,000
Dividend Growth 1,411,248 171,000 67,000
Equity Income 10,397,000 11,031,000 87,000
Equity Index 500 1,568,000 2,766,000 63,000
Extended Equity Market
Index 35,000 - 55,000
Financial Services 530,000 77,000 62,000
Growth & Income 3,062,000 2,502,000 87,000
Growth Stock 2,868,000 2,853,000 108,000
Health Sciences 743,000 69,000 62,000
Media & Telecommunications 354,000 5,000 62,000
Mid-Cap Equity Growth 8,000 - 62,000
Mid-Cap Growth 2,348,000 1,589,000 62,000
Mid-Cap Value 557,000 18,000 62,000
New America Growth 1,421,000 2,655,000 72,000
New Era 1,279,000 240,000 74,000
New Horizons 3,798,000 4,300,000 97,000
Real Estate 127,000 - 62,000
Science & Technology 5,076,000 2,136,000 72,000
Small-Cap Stock 1,342,000 142,000 87,000
Small-Cap Value 1,404,000 1,593,000 62,000
Total Equity Market Index 72,000 - 55,000
Value 1,157,000 327,000 62,000
</TABLE>
All Funds
DISTRIBUTOR FOR THE FUNDS
-------------------------------------------------------------------------------
Investment Services, a Maryland corporation formed in 1980 as a wholly owned
subsidiary of T. Rowe Price, serves as Fund's distributor. Investment
Services is registered as a broker-dealer under the Securities Exchange Act
of 1934 and is a member of the National Association of Securities Dealers,
Inc. The offering of the Fund's shares is continuous.
Investment Services is located at the same address as the Fund and T. Rowe
Price-100 East Pratt Street, Baltimore, Maryland 21202.
Investment Services serves as distributor to the Fund pursuant to an
Underwriting Agreement ("Underwriting Agreement"), which provides that the
Fund will pay all fees and expenses in connection with: 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'
<PAGE>
federal and state registrations as a broker-dealer; and offering and selling
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 U.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. State Street Bank's main office is at 225 Franklin Street,
Boston, Massachusetts 02110.
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 in accordance with regulations under the 1940 Act. The
address for The Chase Manhattan Bank, N.A., London is Woolgate House, Coleman
Street, London, EC2P 2HD, England.
SHAREHOLDER SERVICES BY OUTSIDE PARTIES
-------------------------------------------------------------------------------
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 security
within 60 days). Any material violation of the Code of Ethics is reported to
the Board of the Fund. The Board also reviews the administration of the Code
of Ethics on an annual basis.
<PAGE>
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 equity 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, their expertise in
particular markets 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 services.
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; (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 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,
<PAGE>
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 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.
<PAGE>
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.
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.
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).
Transactions With Related Brokers and Dealers
As provided in the Investment Management Agreement between the Fund and T.
Rowe Price, T. Rowe Price is responsible not only for making decisions with
respect to the purchase and sale of the Fund's portfolio securities, but also
for implementing these decisions, including the negotiation of commissions
and the allocation of portfolio brokerage and principal business. It is
expected that, from time to time, T. Rowe Price may place orders for the
Fund's portfolio transactions with broker-dealer affiliates of Robert Fleming
Holdings Limited ("Robert Fleming" or "Flemings"), an affiliate of
Price-Fleming. Robert Fleming, through Copthall
<PAGE>
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 owned by Robert Fleming.
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 1940 Act, 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.
Other
For the years 1998, 1997, and 1996, 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>
1998 1997 1996
Fund Commissions % Commissions % Commissions %
---- ----------- - ----------- - ----------- -
<S> <C> <C> <C> <C> <C> <C>
Balanced $1,050,595 4.6% $ 1,276,793 9.7% $ 292,325 13.0%
Blue Chip Growth 5,418,392 43.0% 2,567,926 54.2% 748,661 34.6%
Capital Appreciation 1,630,383 45.7% 1,734,274 35.4% 886,009 46.6%
Capital Opportunity 355,413 32.6% 506,307 43.4% 764,518 38.7%
Diversified Small-Cap Growth 94,322 0.5% 107,676 0 (a) (a)
Dividend Growth 1,936,978 59.4% 1,620,702 42.3% 478,131 28.6%
Equity Income 6,883,655 35.2% 8,137,149 59.3% 6,912,071 59.2%
Equity Index 500 258,633 0.5% 150,827 0.0% 37,146 0.0%
Extended Equity Market Index 27,382 0.2% (a) (a) (a) (a)
Financial Services 756,976 2.0% 839,766 3.2% 60,862 0
Growth & Income 2,272,536 28.4% 2,971,378 29.1% 1,874,214 42.7%
Growth Stock 8,459,575 42.0% 5,523,460 53.9% 5,630,241 48.7%
Health Sciences 333,803 54.8% 1,040,908 31.2% 1,488,623 20.4%
Media & Telecommunications 740,649 9.1% 357,871 26.8% 1,659,735 15.0%
Mid-Cap Equity Growth 255,381 29.4% 140,756 21.9% 24,079 12.0%
Mid-Cap Growth 5,757,447 34.8% 4,686,813 32.3% 3,149,050 27.9%
Mid-Cap Value 391,302 46.7% 364,072 36.4% 92,359 17.0%
New America Growth 4,150,396 14.2% 3,220,413 26.6% 1,344,080 31.6%
New Era 1,871,968 57.9% 3,029,701 43.0% 2,500,868 45.2%
New Horizons 8,448,650 5.0% 10,028,310 10.3% 15,900,960 6.5%
Real Estate 162,606 13.8% 35,421 0.8% (a) (a)
Science & Technology 4,348,665 31.3% 4,421,394 33.3% 5,713,825 39.1%
Small-Cap Stock 1,829,514 20.7% 1,742,106 8.3% 1,044,665 5.5%
Small-Cap Value 1,488,300 32.1% 2,503,146 19.1% 1,289,012 31.8%
Total Market Equity Index 28,271 0.2% (a) (a) (a) (a)
Value 1,876,931 75.7% 1,200,103 66.0% 780,033 57.4%
- ------------------------------------------------------------------------------------------
</TABLE>
(a) Prior to commencement of operations.
<PAGE>
On December 31, 1998, the Balanced Fund held common stock of J.P. Morgan with
a value of $2,257,000. The Fund also held a bond of Lehman Brothers Holding,
with a value of $1,625,000. The Fund also held a GMAC MTN valued at $81,000.
In 1997, J.P. Morgan, Lehman Brothers Holding, and GMAC were among the Fund's
regular brokers or dealers as defined in Rule 10b-1 under the 1940 Act.
On December 31, 1998, the Blue Chip Growth Fund held common stock of Chase
Manhattan with a value of $21,900,000, and a Morgan Stanley MTN valued at
$5,005,000. In 1997, Chase Manhattan and Morgan Stanley were among the Fund's
regular brokers or dealers as defined in Rule 10b-1 under the 1940 Act.
On December 31, 1998, the Equity Income Fund held common stock of the
following regular brokers or dealers of the Fund: Bankers Trust -
$106,816,000; Chase Manhattan - $109,500,000; J.P. Morgan - $101,588,000; and
Morgan Stanley (MTN) - $36,035,000. In 1997, Bankers Trust, Chase Manhattan,
J.P. Morgan, and Morgan Stanley were among the Fund's regular brokers or
dealers as defined in Rule 10b-1 under the 1940 Act.
On December 31, 1998, the Equity Index 500 Fund held common stock of the
following regular brokers or dealers of the Fund: Bankers Trust - $2,742,000;
Citicorp - $14,318,000; Chase Manhattan - $11,498,000; J.P. Morgan -
$4,961,000; and Merrill Lynch - $6,041,000. In 1997, Bankers Trust, Citicorp,
Chase Manhattan, J.P. Morgan, and Merrill Lynch were among the Fund's regular
brokers or dealers as defined in Rule 10b-1 under the 1940 Act.
On December 31, 1998, the Financial Services Fund held common stock of the
following regular brokers or dealers of the Fund: Chase Manhattan -
$3,832,000; First Chicago NBD - $1,670,000; Morgan Stanley - $1,035,000; and
Nations Bank Montgomery - $2,372,000. In 1997, Chase Manhattan, First Chicago
NBD, Morgan Stanley, and NationsBank Montgomery were among the Fund's regular
brokers or dealers as defined in Rule 10b-1 under the 1940 Act.
On December 31, 1998, the Growth and Income Fund held common stock or the
following regular brokers or dealers of the Fund: Chase Manhattan -
$49,275,000; and Citicorp - $31,176,000. In 1997, Chase Manhattan and
Citicorp were among the Fund's regular brokers or dealers as defined in Rule
10b-1 under the 1940 Act.
On December 31, 1998, the Growth Stock Fund held common stock of Mellon Bank
valued at $19,703,000. In 1997, Mellon Bank was among the Fund's regular
brokers or dealers as defined in Rule 10b-1 under the 1940 Act.
On December 31, 1998, the Growth & Income and Small-Cap Value Funds held
Morgan Stanley Group MTN, both valued at $10,010,000, respectively. In 1997,
The Morgan Stanley Group was among the Funds' regular brokers or dealers as
defined in Rule 10b-1 under the 1940 Act.
The portfolio turnover rate for each Fund for the years ended 1998, 1997, and
1996, was as follows:
<TABLE>
<CAPTION>
Fund 1998 1997 1996
---- ---- ---- ----
<S> <C> <C> <C>
Balanced 12.5% 15.5% 22.3%
Blue Chip Growth 34.5% 23.7% 26.3%
Capital Appreciation 52.6% 48.3% 44.2%
Capital Opportunity 73.8% 85.0% 107.3%
Diversified Small-Cap Growth 39.8% 13.4% (b)
Dividend Growth 37.3% 39.1% 43.1%
Equity Income 22.6% 23.9% 25.0%
Equity Index 500 4.7% 0.7% 1.3%
Extended Equity Market Index 28.7% (b) (b)
Financial Services 46.8% 46.0% 5.6%(a)
Growth & Income 20.5% 15.7% 13.5%
Growth Stock 54.8% 40.9% 49.0%
- ---------------------------------------------------------------------------
Health Sciences 85.7% 104.4% 133.1%
Media & Telecommunications 48.9% 38.6% 102.9%
Mid-Cap Equity Growth 52.8% 41.0% 31.3%(a)
Mid-Cap Growth 46.7% 42.6% 38.1%
Mid-Cap Value 32.0% 16.0% 3.9%(a)
New America Growth 45.6% 43.2% 36.7%
New Era 23.1% 27.5% 28.6%
New Horizons 41.2% 45.2% 41.4%
Real Estate 56.8% 8.4% (b)
Science & Technology 108.9% 133.9% 125.6%
Small-Cap Stock 25.9% 22.9% 31.1%
Small-Cap Value 17.3% 14.6% 15.2%
Total Equity Market Index 1.9% (b) (b)
Value 72.1% 67.2% 68.0%
- ---------------------------------------------------------------------------
</TABLE>
<PAGE>
(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 that 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.
Investments in mutual funds are valued at the closing net asset value per
share of the mutual fund on the day of valuation. In the absence of a last
sale price, purchased and written options are valued at the mean of the
latest bid and asked prices, respectively.
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.
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.
<PAGE>
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 its liabilities (including accrued expenses
and dividends payable) from its total assets (the market value of the
securities the Fund holds plus cash and other assets, including income
accrued but not yet received) and dividing the result by the total number of
shares outstanding. The net asset value per share of the Fund is 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, Presidents' 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, (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 SEC (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 one day, although the
exact timing is subject to change and can be as great as 10 days.
TAX STATUS
-------------------------------------------------------------------------------
The Fund intends to qualify as a "regulated investment company" under
Subchapter M of the 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 as a capital gain
distribution. 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.
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
<PAGE>
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. Such trusts have been the
only or primary way to invest in certain countries. In addition to bearing
their proportionate share of the trust's expenses (management fees and
operating expenses), shareholders will also indirectly bear similar expenses
of such trusts. Capital gains on the sale of such holdings are considered
ordinary income regardless of how long the fund held its investment. In
addition, the Fund may be subject to corporate income tax and an interest
charge on certain dividends and capital gains earned from these investments,
regardless of whether such income and gains are distributed to shareholders.
To avoid such tax and interest, the Fund intends to treat these securities as
sold on the last day of its fiscal year and recognize any gains for tax
purposes at that time; deductions for losses are allowable only to the extent
of any gains resulting from these deemed sales for prior taxable years. Such
gains and losses will be treated as ordinary income. The Fund will be
required to distribute any resulting income 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 gain 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.
<PAGE>
<TABLE>
<CAPTION>
Cumulative Performance Percentage Change
1 Yr. 5 Yrs. 10 Yrs. % Since Inception
----- ------ ------- ------- ---------
Ended Ended Ended Inception Date
----- ----- ----- --------- ----
12/31/98 12/31/98 12/31/98 12/31/98
-------- -------- -------- --------
<S> <C> <C> <C> <C> <S>
S & P 500 28.57% 193.88% 479.58% -- --
Dow Jones Industrial
Average 18.13 173.37 461.09 -- --
CPI 1.86 12.69 36.35 -- --
Balanced Fund 15.97 93.34 272.43 39,476.74% 12/31/39
Blue Chip Growth Fund 28.84 191.85 -- 233.66 06/30/93
Capital Appreciation
Fund 5.77 82.67 236.86 368.43 06/30/86
Capital Opportunity
Fund 14.70 -- -- 137.12 11/30/94
Diversified Small-Cap
Growth Fund 3.58 -- -- 10.94 06/30/97
Dividend Growth Fund 15.04 153.83 -- 203.08 12/30/92
Equity Income Fund 9.23 136.14 311.08 657.46 10/31/85
Equity Index 500Fund 28.31 189.73 -- 340.45 03/30/90
Financial Services
Fund 11.55 -- -- 78.91 09/30/96
Growth & Income Fund 9.96 123.11 305.26 775.45 12/21/82
Growth Stock Fund 27.41 159.31 410.12 27,314.35 04/11/50
Health Sciences Fund 22.37 -- -- 85.22 12/29/95
Media &
Telecommunications
Fund(a) 35.14 150.08 -- 143.62 10/13/93
Mid-Cap Equity Growth
Fund 21.45 -- -- 66.93 07/31/96
Mid-Cap Growth Fund 22.00 154.76 -- 300.52 06/30/92
Mid-Cap Value Fund 1.39 -- -- 49.88 06/28/96
New America Growth
Fund 17.89 128.88 481.06 745.27 09/30/85
New Era Fund -9.88 57.81 141.73 1,699.80 01/20/69
New Horizons Fund 6.25 112.81 398.70 7,747.35 06/03/60
Real Estate Fund -14.86 -- -- -8.20 10/31/97
Science & Technology
Fund 42.35 197.84 876.95 791.98 09/30/87
Small-Cap Stock Fund -3.46 101.67 257.15 29,036.31 06/01/56
Small-Cap Value Fund -12.47 77.88 272.68 258.45 06/30/88
Value Fund 6.85 -- -- 155.90 09/30/94
- --------------------------------------------------------------------------------
</TABLE>
(a) Figures based on performance as a closed-end investment company traded
on the New York Stock Exchange.
<PAGE>
<TABLE>
<CAPTION>
Average Annual Compound Rates of Return
1 Yr. 5 Yrs. 10 Yrs. % Since Inception
----- ------ ------- ------- ---------
Ended Ended Ended Inception Date
----- ----- ----- --------- ----
12/31/98 12/31/98 12/31/98 12/31/98
-------- -------- -------- --------
<S> <C> <C> <C> <C> <S>
S & P 500 28.57% 24.06% 19.21% -- --
Dow Jones Industrial
Average 18.13 22.28 18.82 -- --
CPI 1.86 2.42 3.15 -- --
Balanced Fund 15.97 14.09 14.05 10.67% 12/31/39
Blue Chip Growth Fund 28.84 23.89 -- 24.48 06/30/93
Capital Appreciation
Fund 5.77 12.81 12.91 13.15 06/30/86
Capital Opportunity
Fund 14.70 -- -- 23.54 11/30/94
Diversified Small-Cap
Growth Fund 3.58 -- -- 7.14 06/30/97
Dividend Growth Fund 15.04 20.48 -- 20.29 12/30/92
Equity Income Fund 9.23 18.75 15.18 16.62 10/31/85
Equity Index 500 Fund 28.31 23.71 -- 18.45 03/30/90
Financial Services
Fund 11.55 -- -- 29.48 09/30/96
Growth & Income Fund 9.96 17.41 15.02 14.50 12/21/82
Growth Stock Fund 27.41 20.99 17.70 12.21 04/11/50
Health Sciences Fund 22.37 -- -- 22.76 12/29/95
Media &
Telecommunications
Fund(a) 35.14 20.12 -- 18.62 10/13/93
Mid-Cap Equity Growth
Fund 21.45 -- -- 23.60 07/31/96
Mid-Cap Growth Fund 22.00 20.57 -- 23.79 06/30/92
Mid-Cap Value Fund 1.39 -- -- 17.49 06/28/96
New America Growth
Fund 17.89 18.01 19.24 17.48 09/30/85
New Era Fund -9.88 9.55 9.23 10.13 01/20/69
New Horizons Fund 6.25 16.31 17.43 11.97 06/03/60
Real Estate Fund -14.86 -- -- -7.07 10/31/97
Science & Technology
Fund 42.35 24.39 25.60 21.47 09/30/87
Small-Cap Stock Fund -3.46 15.06 13.58 14.25 06/01/56
Small-Cap Value Fund -12.47 12.21 14.06 12.92 06/30/88
Value Fund 6.85 -- -- 24.73 09/30/94
- -------------------------------------------------------------------------------
</TABLE>
(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: (a) a
broad-based index; (b) other groups of mutual funds, including T. Rowe Price
Funds, tracked by independent research firms ranking entities, or financial
publications; (c) indices of securities 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
<PAGE>
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 nonqualified retirement plans or any other tax advantage product, may be
illustrated by graphs, charts, etc.; and (5) the sectors or industries in
which the Fund 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 Investment
Services, 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.
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 and/or Investment Services may be made available.
No-Load Versus Load and 12b-1 Funds
Unlike the T. Rowe Price funds, many mutual funds charge sales fees to
investors or use fund assets to finance distribution activities. These fees
are in addition to the normal advisory fees and expenses charged by all
mutual funds. There are several types of fees charged which vary in magnitude
and which may often be used in combination. A sales charge (or "load") can be
charged at the time the fund is purchased (front-end load) or at the time of
redemption (back-end load). Front-end loads are charged on the total amount
invested. Back-end loads or "redemption fees" are charged either on the
amount originally invested or on the amount redeemed. 12b-1 plans allow for
the payment of marketing and sales expenses from fund assets. These expenses
are usually computed daily as a fixed percentage of assets.
The 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 SEC 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.
<PAGE>
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 T. Rowe Price
Equity Index Fund to the T. Rowe Price Equity Index 500 Fund.
All Funds except Capital Appreciation, Equity Income and New America Growth
Funds
CAPITAL STOCK
-------------------------------------------------------------------------------
The Fund's Charter authorizes the Board of Directors/Trustees 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/Trustees
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/Trustees 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/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 directors/trustees
unless and until such time as less than a majority of the directors/ trustees
holding office have been elected by shareholders, at which time the
directors/trustees then in office will call a shareholders' meeting for the
election of directors/trustees. Except as set forth above, the directors/
trustees shall continue to hold office and may appoint successor
directors/trustees. Voting rights are not cumulative, so that the holders of
more than 50% of the shares voting in the election of directors/trustees can,
if they choose to do so, elect all the directors/trustees of the Fund, in
which event the holders of the remaining shares will be unable to elect any
person as a director/trustee. 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
<PAGE>
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 1940
Act.
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 SEC under the 1940 Act as
diversified, open-end investment companies, commonly known as "mutual fund."
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.
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 1940 Act, 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
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.
<PAGE>
All Funds
FEDERAL REGISTRATION OF SHARES
-------------------------------------------------------------------------------
The Fund's shares are registered for sale under the 1933 Act. 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
-------------------------------------------------------------------------------
Swidler Berlin Shereff Friedman, LLP, whose address is 919 Third Avenue, New
York, New York 10022-9998, is legal counsel to the Fund.
INDEPENDENT ACCOUNTANTS
-------------------------------------------------------------------------------
PricewaterhouseCoopers LLP, 250 West Pratt Street, 21st Floor, Baltimore,
Maryland 21201, are the independent accountants to the Funds.
The financial statements of the Funds for the year ended December 31, 1998,
and the report of independent accountants are included in the Fund's Annual
Report for the year ended December 31, 1998. The audited financial statements
of T. Rowe Price Extended Equity Market Index Fund, Inc., and T. Rowe Price
Total Equity Market Index Fund, Inc., for the period January 30,1998
(commencement of operations) to December 31, 1998, are included in their
Annual Reports for the period ended December 31, 1998. A copy of the Annual
Report accompanies this Statement of Additional Information. The following
financial statements and the report of independent accountants appearing in
the Annual Report for the year ended December 31, 1998, are incorporated into
this Statement of Additional Information by reference:
<TABLE>
<CAPTION>
ANNUAL REPORT REFERENCES:
CAPITAL EQUITY NEW AMERICA NEW ERA
APPRECIATION INDEX 500 GROWTH -------
------------ --------- ------
<S> <C> <C> <C> <C>
Report of Independent
Accountants 27 28 20 21
Statement of Net Assets,
December 31, 1998 13-20 3-21 11-14 11-15
Statement of Operations, year
ended
December 31, 1998 21 22 15 16
Statement of Changes in Net
Assets, years ended
December 31, 1998 and December
31, 1997 22 23 16 17
Notes to Financial Statements,
December 31, 1998 23-26 24-27 17-19 18-20
Financial Highlights 12 2 10 10
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SMALL-CAP MEDIA & DIVIDEND EQUITY
STOCK TELECOMMUNICATIONSGROWTH INCOME
----- --------------- ------
<S> <C> <C> <C> <C>
Report of Independent Accountants 27 19 23 24
Statement of Net Assets, December
31, 1998 12-21 11-13 10-17 10-17
Statement of Operations, year ended
December 31, 1998 22 14 18 18
Statement of Changes in Net Assets,
years ended
December 31, 1998 and December 31,
1997 23 15 19 19
Notes to Financial Statements,
December 31, 1998 24-26 16-18 20-22 20-23
Financial Highlights 11 10 9 9
</TABLE>
<TABLE>
<CAPTION>
VALUE CAPITAL FINANCIAL MID-CAP
----- OPPORTUNITY SERVICES VALUE
----------- -------- -----
<S> <C> <C> <C> <C>
Report of Independent Accountants 21 22 20 24
Statement of Net Assets, December
31, 1998 9-15 12-16 12-14 11-17
Statement of Operations, year
ended
December 31, 1998 16 17 15 18
Statement of Changes in Net
Assets, years ended
December 31, 1998 and December
31, 1997 17 18 16 19
Notes to Financial Statements,
December 31, 1998 18-20 19-21 17-19 20-23
Financial Highlights 8 11 11 10
</TABLE>
<TABLE>
<CAPTION>
SCIENCE & BLUE CHIP GROWTH & HEALTH
TECHNOLOGY GROWTH INCOME SCIENCES
---------- ------ ------ --------
<S> <C> <C> <C> <C>
Report of Independent 2
Accountants 20 27 23 0
Statement of Net Assets,
December 31, 1998 11-14 13-20 9-16 11-14
Statement of Operations, year
ended
December 31, 1998 15 21 17 15
Statement of Changes in Net
Assets, years ended
December 31, 1998 and December
31, 1997 16 22 18 16
Notes to Financial Statements,
December 31, 1998 17-19 23-26 19-22 17-19
Financial Highlights 10 12 8 10
</TABLE>
<TABLE>
<CAPTION>
BALANCED NEW GROWTH MID-CAP
-------- HORIZONS STOCK GROWTH
-------- ----- ------
<S> <C> <C> <C> <C>
3
Report of Independent Accountants 48 0 24 24
1
1
Portfolio of Investments, December -
31, 1998 11-40 22 11-17 12-17
Statement of Assets and Liabilities, 2
December 31, 1998 41 3 18 18
Statement of Operations, year ended 2
December 31, 1998 42 4 19 19
Statement of Changes in Net Assets,
years ended
December 31, 1998 and December 31, 2
1997 43 5 20 20
Notes to Financial Statements, 26-
December 31, 1998 44-47 29 21-23 21-23
1
Financial Highlights 10 0 10 11
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MID-CAP
EQUITY GROWTH
-------------
<S> <C>
Report of Independent Accountants 15
Statement of Net Assets, December 31, 1998 8-10
Statement of Operations, year ended December 31, 1998 11
Statement of Changes in Net Assets, years ended
December 31, 1998 and December 31, 1997 12
Notes to Financial Statements, December 31, 1998 13-14
Financial Highlights 7
</TABLE>
<TABLE>
<CAPTION>
SMALL-CAP
VALUE
-----
<S> <C>
Report of Independent Accountants 28
Portfolio of Investments, December 31, 1998 11-21
Statement of Assets and Liabilities, December 31, 1998 22
Statement of Operations, year ended December 31, 1998 23
Statement of Changes in Net Assets, years ended
December 31, 1998 and December 31, 1997 24
Notes to Financial Statements, December 31, 1998 25-27
Financial Highlights 10
</TABLE>
<TABLE>
<CAPTION>
DIVERSIFIED
SMALL-CAP
GROWTH
------
<S> <C>
Report of Independent Accountants 28
Statement of Net Assets, year ended December 31, 1998 11-22
Statement of Operations, year ended December 31, 1998 23
Statement of Changes in Net Assets, years ended
December 31, 1998 and June 20, 1997 (commencement of
operations) to December 31, 1998 24
Notes to Financial Statements, December 31, 1998 25-27
Financial Highlights 10
</TABLE>
<TABLE>
<CAPTION>
REAL ESTATE
-----------
<S> <C>
Report of Independent Accountants 18
Statement of Net Assets, year ended December 31, 1998 10-12
Statement of Operations, year ended December 31, 1998 13
Statement of Changes in Net Assets, years ended
December 31, 1998 and October 31, 1997 (commencement
of operations) to December 31, 1998 14
Notes to Financial Statements, December 31, 1998 15-17
Financial Highlights 9
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXTENDED EQUITY
MARKET INDEX
------------
<S> <C>
Report of Independent Accountants 42
Portfolio of Investments, December 31, 1998 3-35
Statement of Assets and Liabilities, December 31, 1998 36
Statement of Operations, January 30, 1998
(commencement of operations) to December 31, 1998 37
Statement of Changes in Net Assets, January 30, 1998
(commencement of operations) to December 31, 1998 38
Notes to Financial Statements, December 31, 1998 39-41
Financial Highlights 2
</TABLE>
<TABLE>
<CAPTION>
TOTAL MARKET
EQUITY INDEX
------------
<S> <C>
Report of Independent Accountants 38
Statement of Net Assets, December 31, 1998 3-32
Statement of Operations, January 30, 1998
(commencement of operations) to December 31, 1998 33
Statement of Changes in Net Assets, January 30, 1998
(commencement of operations) to December 31, 1998 34
Notes to Financial Statements, December 31, 1998 35-37
Financial Highlights 2
</TABLE>
RATINGS OF CORPORATE DEBT SECURITIES
-------------------------------------------------------------------------------
Moody's Investors Service, Inc.
Aaa-Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edge."
Aa-Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally 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.
<PAGE>
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
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.
Fitch IBCA, 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
<PAGE>
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.
