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Previous: PUTNAM BALANCED GOVERNMENT FUND, 497, 1994-07-11 |
Next: CENTRAL EQUITY TRUST UTILITY SERIES 14, 485BPOS, 1994-07-11 |
<PAGE>
FELLOW SHAREHOLDERS
Before we review the financial markets and your Fund's performance, we want to
mention that you have received two consecutive annual reports because your
Fund's fiscal year-end was recently changed from February 28 to May 31.
MARKET ENVIRONMENT
A narrative of recent developments in the mortgage-backed securities market
fits the proverbial two-steps-forward, one-step-back pattern. In recent
reports we noted two favorable developments for the adjustable rate mortgage
(ARM) market: the decline in prepayment risk as rates rose and increasing
demand from financial institutions other than mutual funds.
The three months ended May 31 were definitely a step back. Unexpected
turmoil in the longer-term bond markets following the Federal Reserve's
early-February switch to a tighter monetary policy also roiled ARM securities
in several ways. The drop in prepayments became so precipitous it raised a
wholly new concern: extension risk. This refers to the sudden lengthening of
maturity when a bond is no longer apt to be called or, in the case of
mortgage-backed securities, prepaid. The longer the maturity, the greater the
price drop when rates rise. As rates rose swiftly across all maturities,
prospective investors stepped to the sidelines.
Mortgage-backed securities were also hurt by a chain reaction started by the
difficulties of a highly leveraged hedge fund. As rates rose, this fund was
forced to sell holdings at distressed prices to meet margin calls. In the
past, such speculative funds were major buyers of the most illiquid pieces of
CMOs (collateralized mortgage obligations). In recent weeks, as many of these
funds withdrew from the market, investment bankers virtually halted production
of CMOs, thus removing an important source of demand for both whole mortgages
and mortgage-backed securities. (CMOs are created by carving up the income and
principal flow from a pool of mortgages or mortgage-backed securities to
create new groupings called "tranches." Investors buy the tranches whose
characteristics fit their maturity and income needs, but if there is no market
for the most speculative and illiquid tranch, the CMO will usually not be
created.)
At the very time that demand for ARM securities was shrinking for a variety
of reasons, the supply of new ARMs (as a percent of mortgage production) was
rising as homeowners raced to secure low-cost mortgage financing before
attractive rates disappeared altogether. The result of all these developments
was falling ARM prices.
The chart below shows the extremely steep rise of very short-term yields,
represented here by the one-year Treasury bill, compared with your Fund's
yield. The Fund's yield will parallel this rise as rates reset on the
underlying mortgages; in about three months, it should exceed the Treasury
bill rate by at least a percentage point. ARMs tied to six-month and one-year
Treasury bills will reset most quickly, and these compose 73% of the Fund's
portfolio.
The other major index for ARMs, the COFI, which reflects mortgage rates set
by West Coast savings institutions, is always slower to reflect market trends.
Recently, the COFI has lagged more than usual as lenders offered "sale rates"
to pump up their mortgage production. We have gradually pared our holdings of
COFI ARMs, but believe it is prudent to maintain some exposure for
diversification purposes.
YIELD COMPARISON CHART
A line graph compares the Adjustable Rate U.S. Government Fund yield against
the 1-Year Treasury Bill yield from 5/31/93 to 5/31/94.
<PAGE>
PERFORMANCE AND STRATEGY REVIEW
Your Fund's income of $0.05 per share was more than offset by a $0.10 drop in
share price, resulting in a negative total return for the quarter. As is
typical, the opposite was true for the 12-month period, with accumulated
income more than offsetting principal loss for a positive return. As shown
below, the Fund performed in line with its peer group for both investment
periods.
PERFORMANCE COMPARISON
Periods Ended
5/31/94
3 Months 12 Months
------------------
Adjustable Rate U.S.
Government Fund -0.97% 1.32%
Lipper Average of Adjustable
Rate Mortgage Funds -0.98 1.37
- -----------------------------------------------
We made no significant portfolio changes during the quarter. We continued to
maintain a small (2%) position in agency-backed stripped mortgages. (The
components of 30-year fixed rate mortgages are stripped away so each one can
be bought separately.) Half of this position consists of interest-only
securities, which have benefited the Fund because their price rises when rates
rise. The balance is a principal-only security purchased at a substantial
discount which we expect to be paid off at par in the coming months.
Prepayment rates will continue to slow but not, we believe, to the extreme
currently reflected in prices of these securities. Because the values of
stripped mortgages are very sensitive to interest rate changes, we limit such
investments to less than 5% of assets.
OUTLOOK
The rise in interest rates along with higher taxes should dampen the pace of
economic growth during the balance of the year. However, consumer sentiment
has been buoyed by the falling unemployment rate and gains in personal income,
and interest rates are still relatively low compared with the 1980s. Thus, any
slowdown should be gradual. We expect that, if economic growth is around a 3%
rate in the second half, the Federal Reserve will tighten monetary policy a
bit further before the year is out. The magnified response of note and bond
yields to the initial phase of Fed tightening is probably over, judging from
the reaction of bond yields to the tightening in May. A flattening of the
yield curve with short-term rates rising more than long-term yields is typical
of this phase of the interest rate cycle. Nevertheless, bond investors are
highly sensitive to signs of inflation, and bond markets will remain volatile.
Our near-term outlook for the ARM market is cautious since interest rates
are likely to inch up, creating a drag on short-term performance.
Additionally, demand for ARM securities seems likely to remain subdued until
the markets settle down and investor confidence recovers from recent events.
However, we are encouraged by signs of favorable investor response to the
belated yield rise on COFI ARMs and would expect a similar reaction as other
ARM securities reestablish their normal yield advantage over money market
securities.
Your Fund will continue to meet the needs of conservative investors who
desire a higher income return than is provided by money funds, do not need the
daily price stability of a money fund, and want less principal risk than is
represented by short- or longer-term bond funds. The key to realizing the
potential of this Fund is to remain invested for at least six months to a
year, so that the income accumulates to offset price declines.
Respectfully submitted,
/s/ Peter Van Dyke
Peter Van Dyke
President and Chairman of the
Investment Advisory Committee
June 17, 1994
<PAGE>
STATISTICAL HIGHLIGHTS
T. ROWE PRICE ADJUSTABLE RATE U.S. GOVERNMENT FUND / MAY 31, 1994
KEY STATISTICS
Dividend Yield* Periods Ended 5/31/94
- ------------------------------- ---------------------
3 Months 4.57%
12 Months 4.80
Dividend Per Share
- -------------------------------
3 Months $0.05
12 Months 0.22
Change in Per-Share Value
- -------------------------------
3 Months (From $4.75 to $4.65) -$0.10
12 Months (From $4.81 to $4.65) -0.16
- -----------------------------------------------------
*Dividends earned and reinvested for the periods indicated are annualized and
divided by the average daily net asset values per share for the same period.
QUALITY DIVERSIFICATION
Percent of Net Assets
TRPA Quality Rating* 5/31/93 2/28/94 5/31/94
- -------------------- ------- ------- -------
1 82% 81% 85%
2 18 19 15
3 0 0 0
4 0 0 0
- --------------------------------------------
WEIGHTED AVERAGE 1.2 1.2 1.2
- --------------------------------------------
*On a scale of 1 to 10, with Grade 1 representing highest quality.
SECTOR DIVERSIFICATION
Percent of Net Assets
5/31/93 2/28/94 5/31/94
------- ------- -------
FNMA Adjustable
Rate Mortgages 44% 43% 47%
FHLMC Adjustable
Rate Mortgages 15 12 13
GNMA Adjustable
Rate Mortgages 13 9 11
Agency-Backed
Stripped Mortgages 0 3 2
U.S. Treasury
Securities 6 2 3
FHLMC Floating Rate
Note 0 2 1
FNMA Floating Rate
Note 0 2 1
GNMA Fixed Rate
Mortgages 3 1 1
Non-Government
Adjustable
Rate Mortgages 14 14 15
Non-Government
Fixed Rate
Mortgages 7 9 4
Federal Farm Credit
Bank 3 0 0
FNMA 0 2 0
Other Assets
Less Liabilities -5 1 2
- --------------------------------------------
100% 100% 100%
- --------------------------------------------
INDEX DIVERSIFICATION
Percent of
ARM Securities
5/31/93 2/28/94 5/31/94
------- ------- -------
11th District Cost
of Funds Index
(COFI) 31% 26% 24%
1-Year Constant
Maturity Treasury
(CMT) 51 55 58
6-Month Treasury
Bill 12 14 15
1-Month London
Interbank Offered
Rate 6 5 3
- --------------------------------------------
100% 100% 100%
- --------------------------------------------
<PAGE>
INVESTMENT RECORD
T. ROWE PRICE ADJUSTABLE RATE U.S. GOVERNMENT FUND
The table below shows the investment record of one share of the T. Rowe Price
Adjustable Rate U.S. Government Fund, purchased at the initial offering price
of $5.00, for the period 9/30/91 through 5/31/94. Over this time, interest
rates have been volatile. The results shown should not be considered a
representation of the dividend income or capital gain or loss which may be
realized from an investment made in the Fund today.
- ------------------------------------------------------------------------------
With
Dividends
Fiscal Net Capital With and Capital
Year Asset Income Gain Dividends Gains Total
Ended Value Dividends Distributions Reinvested Reinvested Return
[S] [C] [C] [C] [C] [C] [C]
2/29/92 /1/ $4.97 $0.16 - $5.13 $5.13 2.58%
1993 4.83 0.30 - 5.30 5.30 3.33
1994 4.75 0.23 - 5.46 5.46 3.11
5/31/94 /2/ 4.65 0.05 - 5.41 5.41 -0.97
- ------------------------------------------------------------------------------
TOTAL $0.74 -
- ------------------------------------------------------------------------------
/1/ From inception 9/30/91 to 2/29/92.
/2/ Fiscal year-end changed from February 28 to May 31; figures are for three
months from 3/1/94-5/31/94.
FISCAL-YEAR PERFORMANCE COMPARISON CHART
A line graph compares the 5/31/94 value of a hypothetical $10,000 investment
made in the Adjustable Rate U.S. Government Fund at its inception (9/30/91)
and a similar investment made concurrently in the Salomon Brother 6-Month
T-Bill Index. At 5/31/94, the Fund invest would have been worth $10823 and the
Salomon Index investment would have been worth $11052.
FISCAL-YEAR PERFORMANCE
Periods Ended May 31, 1994
Since Inception
1 Year (9/30/91)*
------ ---------------
1.32% 3.01%
- -----------------------
* Average annual compound total return
Income return and principal value represent past performance and will vary.
Shares may be worth more or less at redemption than at original purchase.
<PAGE>
STATEMENT OF NET ASSETS (AMOUNTS IN THOUSANDS)
T. ROWE PRICE ADJUSTABLE RATE U.S. GOVERNMENT FUND / MAY 31, 1994
<TABLE>
<CAPTION>
U.S. Government Agency ARM/1/---70.8%
Face
Amount Value
-------- --------
<S> <C> <C>
Federal Home Loan Mortgage,
1 Year CMT, resets annually, 5.366%-5.612%, 2/1/17-12/1/18................................... $2,299 $2,349
6.702%, 5/1/20........................................................................... 1,100 1,147
resets semi-annually, 5.174%-5.801%, 11/1/18-7/1/29........................................ 14,118 14,433
COFI, resets annually, 5.906%, 4/1/18........................................................ 814 818
resets monthly, 4.870%-5.000%, 3/1/97-1/1/30............................................... 4,425 4,360
resets semi-annually, 5.216%, 6/1/29....................................................... 1,704 1,713
Federal National Mortgage Assn.,
1 Year CMT, resets annually, 4.480%, 12/1/18................................................. 1,645 1,675
5.006%-5.478%, 4/1/14-11/1/29............................................................ 36,204 36,789
5.550%-6.227%, 12/1/13-8/1/21............................................................ 6,724 6,904
7.431%, 10/1/21.......................................................................... 920 953
resets semi-annually, 5.251%-5.415%, 10/1/18-10/1/19....................................... 2,059 2,120
6.165%-6.554%, 5/1/20-7/1/20............................................................. 5,648 5,828
COFI, resets monthly, 4.875%-5.063%, 12/1/16-5/1/31.......................................... 4,016 3,977
5.470%-5.500%, 12/1/17-1/1/19............................................................ 4,314 4,308
6.817%, 10/1/14.......................................................................... 11 11
resets semi-annually, 5.000%-5.434%, 8/1/17-11/1/20........................................ 1,973 1,961
6 month CD Index, resets semi-annually, 5.556%, 11/1/21...................................... 384 393
6 month LIBOR, resets semi-annually, 4.908%, 5/1/21.......................................... 1,579 1,610
6 month T-Bill Index, resets semi-annually, 5.129%-5.571%, 1/1/16-9/1/26..................... 18,670 19,213
6.209%-6.905%, 9/1/00-3/1/26............................................................... 2,031 2,098
Government National Mortgage Assn.,
1 Year CMT, resets annually, 5.125%-5.500%, 12/20/20-5/20/23................................. 20,531 20,111
- -----------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AGENCY ARM (COST - $135,725) 132,771
Stripped Mortgage Securities**---1.7%
Federal National Mortgage Assn., Interest Only, 7.500%, 11/25/23............................... 2,727 943
8.500%, 4/25/22.............................................................................. 338 106
9.000%, 6/25/22.............................................................................. 2,051 580
Federal Home Loan Mortgage, Principal Only, Zero Coupon, 2/15/24............................... 1,823 1,502
- -----------------------------------------------------------------------------------------------------------------
TOTAL STRIPPED MORTGAGE SECURITIES (COST - $3,415) 3,131
U.S. Government Agency Floating Rates Notes/1/---2.5%
Federal Home Loan Mortgage, resets monthly, 5.100%, 3/15/23.................................... 2,005 2,003
Federal National Mortgage Assn., resets monthly, 4.943%, 3/25/08............................... 2,742 2,740
- -----------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AGENCY FLOATING RATE NOTES (COST - $4,758) 4,743
Non-Government Agency ARM/1/---14.8%
Resolution Trust Corp., MPC,
COFI, resets annually, 5.237%, 1/25/27....................................................... $2,007 $2,011
resets semi-annually, 5.032%, 7/27/20...................................................... 4,417 4,285
5.370%, 2/25/21.......................................................................... 4,130 4,066
1 Year CMT, resets annually, 4.830%, 11/15/20................................................ 3,051 3,005
6.302%, 12/25/20......................................................................... 714 732
6 month T-Bill Index, resets monthly, 5.863%, 4/25/21........................................ 1,280 1,307
Ryland Mercury Savings Trust, MPC, COFI, resets semi-annually, 5.610%, 10/15/18................ 896 892
Ryland Mortgage Securities, American Home Funding, MPC, COFI, resets monthly, 5.615%, 5/25/17.. 1,215 1,227
Salomon Brothers Mortgage Securities VII, MPC, COFI, resets monthly, 4.451%, 11/25/20.......... 7,471 7,471
Salomon Brothers Mortgage Securities, MPC, COFI, resets semi-annually, 5.625%, 8/25/18......... 1,542 1,526
Western Federal Savings and Loan, MPC, COFI, resets semi-annually, 5.628%, 7/1/18.............. 1,259 1,246
- -----------------------------------------------------------------------------------------------------------------
TOTAL NON-GOVERNMENT AGENCY ARM (COST - $28,268) 27,768
Non-Government Agency CMO---2.4%
Citicorp Mortgage Securities, 6.000%, 3/25/22 (Cost - $4,741).................................. 4,705 4,505
Other Asset-Backed Securities---1.8%
HFC Home Equity Loan Certificates, 4.750%, 5/20/08 (Cost $3,610)............................... 3,618 3,483
U.S. Government Guaranteed Obligations---1.2%
Government National Mortgage Assn., 11.500%, 3/15/10-11/1/16
(Cost $2,212)................................................................................ 1,936 2,219
U.S. Government Obligations---2.7%
U.S. Treasury Bills, 3.08%, 6/2/94 (Cost $4,996)............................................... 5,000 4,995
- -----------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES - 97.9% (COST - $187,725)...................................... $183,615
- -----------------------------------------------------------------------------------------------------------------
Other Assets Less Liabilities - 2.1% .......................................................... 3,902
--------
NET ASSETS CONSISTING OF:
Accumulated net investment income - net of distributions ...................................... $75
Accumulated realized gains/losses - net of distributions ...................................... (19,265)
Unrealized depreciaton of investments.......................................................... (4,110)
Paid-in-capital applicable to 40,296,171 shares of $0.01 par value capital
stock outstanding; 1,000,000,000 shares authorized........................................... 210,817
--------
NET ASSETS - 100.0% ........................................................................... $187,517
--------
--------
NET ASSET VALUE PER SHARE...................................................................... $4.65
--------
--------
- -----------------------------------------------------------------------------------------------------------------
<FN>
/1/ Rates disclosed are as of May 31, 1994
** For Interest Only securities, face amount represents notional principal, on
which the Fund receives interest.
ARM - Adjustable Rate Mortgages
CMO - Collateralized Mortgage Obligation
MPC -
Mortgage Pass-through Certificates
The Adjustable Rate Mortgage securities are reset periodically based on the
following indices:
COFI - Cost of Funds Index in the Eleventh Federal Reserve district.
CMT - Constant Maturity U.S. Treasury Index.
6 Month CD Index - 6 Month Certificate of Deposit Index.
6 Month LIBOR - 6 Month London Interbank Offered Rate Index.
6 Month Treasury Bill Index - 6 Month Treasury Bill discount rate index.
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
STATEMENT OF OPERATIONS
T. ROWE PRICE ADJUSTABLE RATE U.S. GOVERNMENT FUND
<TABLE>
<CAPTION>
Three Months Ended
May 31, 1994 Year Ended
[double dagger] Feb. 28, 1994
--------------------- -------------
Amounts in Thousands
-----------------------------------
<S> <C> <C>
INVESTMENT INCOME
Interest income................................. $2,687 $16,889
--------------------- -------------
Expenses
Investment management fees.................... 100 526
Shareholder servicing fees & expenses......... 90 443
Custodian and accounting fees & expenses...... 29 154
Prospectus & shareholder reports.............. 13 55
Registration fees & expenses.................. 11 59
Legal & auditing fees......................... 8 26
Directors' fees & expenses.................... 2 11
Miscellaneous ................................ 6 29
--------------------- -------------
Total expenses................................ 259 1,303
--------------------- -------------
Net investment income........................... 2,428 15,586
--------------------- -------------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS
Net realized loss............................... (954) (3,117)
Change in unrealized appreciation or
depreciation.................................. (3,465) (2,319)
--------------------- -------------
Net loss on investments......................... (4,419) (5,436)
--------------------- -------------
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS...................................... $(1,991) $10,150
--------------------- -------------
--------------------- -------------
- ------------------------------------------------------------------------------------
<FN>
[double dagger]The Fund's fiscal year-end was changed to May 31.
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
T. ROWE PRICE ADJUSTABLE RATE U.S. GOVERNMENT FUND
<TABLE>
<CAPTION>
Three
Months Ended
May 31, 1994 Year Ended
[double ---------------------------------------
dagger] Feb. 28, 1994 Feb. 28, 1993
------------ ------------- -------------
Amounts in Thousands
----------------------------------------------------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations
Net investment income.................................. $2,428 $15,586 $36,254
Net realized loss on investments....................... (954) (3,117) (20,881)
Change in unrealized appreciation or depreciation of 2,901
investments.......................................... (3,465) (2,319) -------------
------------ -------------
Increase (decrease) in net assets from operations...... (1,991) 10,150 18,274
------------ ------------- -------------
Distributions to shareholders
Net investment income.................................. (2,355) (11,303) (34,588)
Tax return of capital.................................. - (4,132) (2,627)
------------ ------------- -------------
Decrease in net assets from distributions to
shareholders......................................... (2,355) (15,435) (37,215)
------------ ------------- -------------
Capital share transactions/1/
Sold................................................... 15,975 86,042 778,109
Distributions reinvested .............................. 1,885 13,827 27,005
Redeemed .............................................. (51,151) (345,878) (652,664)
------------ ------------- -------------
Increase (decrease) in net assets from capital share
transactions......................................... (33,291) (246,009) 152,450
------------ ------------- -------------
Total increase (decrease)................................ (37,637) (251,294) 133,509
NET ASSETS
Beginning of period.................................... 225,154 476,448 342,939
------------ ------------- -------------
End of period.......................................... $187,517 $225,154 $476,448
------------ ------------- -------------
------------ ------------- -------------
- --------------------------------------------------------------------------------------------------------------------
/1/Share transactions
Sold................................................... 3,396 shs. 17,922 shs. 157,289 shs.
Distributions reinvested .............................. 402 2,877 5,491
Redeemed .............................................. (10,875) (71,987) (133,173)
------------ ------------- -------------
Increase (decrease) in shares outstanding.............. (7,077) shs. (51,188) shs. 29,607 shs.
------------ ------------- -------------
------------ ------------- -------------
- --------------------------------------------------------------------------------------------------------------------
<FN>
[double dagger]The Fund's fiscal year-end was changed to May 31.
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
T. Rowe Price Adjustable Rate U.S. Government Fund / May 31, 1994
NOTE 1---SIGNIFICANT ACCOUNTING POLICIES
T. Rowe Price Adjustable Rate U. S. Government Fund (the Fund) is registered
under the Investment Company Act of 1940 as a diversified, open-end management
investment company. Effective March 1, 1994, the fiscal year-end of the Fund
changed from February 28 to May 31.
A) Security valuation---Debt securities are generally traded in the
over-the-counter market. Investments in securities with remaining maturities
of one year or more are stated at fair value as furnished by dealers who make
markets in such securities or by an independent pricing service, which
considers yield or price of bonds of comparable quality, coupon, maturity, and
type, as well as prices quoted by dealers who make markets in such securities.
Securities with remaining maturities less than one year are stated at fair
value which is determined by using a matrix system that establishes a value
for each security based on money market yields.
Assets and liabilities for which the above valuation procedures are
inappropriate or are deemed not to reflect fair value are stated at fair value
as determined in good faith by, or under the supervision of, the officers of
the Fund, as authorized by the Board of Directors.
B) Premiums and Discounts---Except for Mortgage-Backed securities, premiums
and discounts on debt securities are amortized for both financial and tax
reporting purposes.
C) Other---Income and expenses are recorded on the accrual basis. Investment
transactions are accounted for on the trade date. Realized gains and losses
are reported on an identified cost basis. Distributions to shareholders are
recorded by the Fund on the ex-dividend date. Income and capital gain
distributions are determined in accordance with federal income tax regulations
which may differ from generally accepted accounting principles.
NOTE 2---PORTFOLIO TRANSACTIONS
Purchases and sales of portfolio and U.S. Government securities, excluding
short-term, were as follows:
Three Months
Ended Year Ended
May 31, 1994 Feb. 28, 1994
------------ -------------
Portfolio Securities
Purchases $ -0- $ 32,384,000
Sales 10,474,000 84,405,000
U.S. Government Securities
Purchases $13,768,000 $198,887,000
Sales 33,311,000 403,165,000
NOTE 3---FEDERAL INCOME TAXES
No provision for federal income taxes is required since the Fund intends to
continue to qualify as a regulated investment company and distribute all of
its taxable income. The Fund has unused realized capital loss carryforwards
for federal income tax purposes of $18,984,000 at May 31, 1994, which expire
in 2000 through 2002.
At May 31, 1994, the aggregate cost of investments for federal income tax
and financial reporting purposes was $187,725,000 and net unrealized
depreciation aggregated $4,110,000, of which $51,000 related to appreciated
investments and $4,161,000 to depreciated investments.
NOTE 4---RELATED PARTY TRANSACTIONS
The investment management agreement between the Fund and T. Rowe Price
Associates, Inc. (the Manager) provides for an annual investment management
fee, computed daily and paid monthly, consisting of an Individual Fund Fee
equal to 0.10% of average daily net assets and a Group Fee. The Group Fee is
based on the combined assets of certain mutual funds sponsored by the Manager
or Rowe Price-Fleming International, Inc. (the Group). The Group Fee rate
ranges from 0.48% for the first $1 billion of assets to 0.31% for assets in
excess of $34 billion. The effective annual Group Fee rate at May 31, 1994,
and for the three months then ended was 0.34%. The rate at February 28, 1994
was 0.34%, and for the year then ended was 0.35%. The Fund pays a pro rata
portion of the Group Fee based on the ratio of the Fund's net assets to those
of the Group.
<PAGE>
Under the terms of the investment management agreement, the Manager is
required to bear any expenses through May 31, 1996, which would cause the
Fund's ratio of expenses to average net assets to exceed 0.70%. The limitation
will be phased-in as follows: 0.50% on March 1, 1994, 0.60% on September 1,
1994 and 0.70% on March1, 1995. Thereafter, the Fund is required to reimburse
the Manager for these expenses, provided average net assets have grown or
expenses have declined sufficiently so as not to cause the Fund's ratio of
expenses to average net assets to exceed 0.70% in any month, and that no such
reimbursement shall be made to the Manager after May 31, 1998. Pursuant to
this agreement $130,000 of management fees were not accrued by the Fund for
the three months ended May 31, 1994. Pursuant to a previous agreement,
$938,000 of unaccrued fees from the year ended February 28, 1994, remain
subject to reimbursement through December 31, 1995.
T. Rowe Price Services, Inc. (TRPS) and Retirement Plan Services, Inc. (RPS)
are wholly owned subsidiaries of the Manager. TRPS provides transfer and
dividend disbursing agent functions and shareholder services for all accounts.
RPS provides subaccounting and recordkeeping services for certain retirement
accounts invested in the Fund. The Manager, under a separate agreement,
calculates the daily share price and maintains the financial records of the
Fund. For the three months ended May 31, 1994, and the year ended February 28,
1994, the Fund incurred fees totalling approximately $98,000 and $469,000,
respectively, for these services provided by related parties. At May 31, 1994,
investment management and service fees payable were $77,000.
<PAGE>
FINANCIAL HIGHLIGHTS
T. ROWE PRICE ADJUSTABLE RATE U.S. GOVERNMENT FUND
<TABLE>
<CAPTION>
For a share outstanding throughout each
period
--------------------------------------------
Sept. 30,
1991
Three Months (Commencement
Ended of
May 31, Year Ended Operations)
1994 ----------------- to
[double Feb. 28, Feb. 28, Feb. 29,
dagger] 1994 1993 1992
------------ -------- -------- -------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD..... $4.75 $4.83 $4.97 $5.00
------------ -------- -------- -------------
Investment Activities
Net investment income.................. 0.06* 0.23* 0.29* 0.16*
Net realized and unrealized loss....... (0.11) (0.08) (0.13) (0.03)
------------ -------- -------- -------------
Total from Investment Activities......... (0.05) 0.15 0.16 0.13
------------ -------- -------- -------------
Distributions
Net investment income.................. (0.05) (0.17) (0.28) (0.16)
Tax return of capital.................. - (0.06) (0.02) -
------------ -------- -------- -------------
Total Distributions...................... (0.05) (0.23) (0.30) (0.16)
------------ -------- -------- -------------
NET ASSET VALUE, END OF PERIOD........... $4.65 $4.75 $4.83 $4.97
- --------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Total Return............................. (0.97)% 3.11% 3.33% 2.58%
Ratio of Expenses to Average Net Assets.. 0.50% 0.40%* 0.25%* 0.00%
[dagger]* [dagger]*
Ratio of Net Investment Income to Average
Net Assets............................. 4.69% 4.78% 5.96% 7.45%
[dagger] [dagger]
Portfolio Turnover Rate.................. 27.6% 70.4% 110.8% 98.4%
[dagger] [dagger]
Net Assets, End of Period
(in thousands)......................... $187,517 $225,154 $476,448 $342,939
- --------------------------------------------------------------------------------------
<FN>
[double dagger]The Fund's fiscal year-end was changed to May 31.
[dagger]Annualized.
*The manager agreed to bear all expenses of the Fund through
June 30, 1992. Excludes expenses in excess of a 0.20% voluntary
expense limitation in effect July 1, 1992 through July 31,
1992, and a 0.30% voluntary expense limitation in effect August
1, 1992 through August 31, 1992, and a 0.40% voluntary expense
limitation in effect September 1, 1992 through February 28,
1994, and a 0.50% voluntary expense limitation in effect March
1, 1994 through August 31, 1994.
</TABLE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of
T. Rowe Price Adjustable Rate U. S. Government Fund, Inc.
We have audited the accompanying statement of net assets of T. Rowe Price
Adjustable Rate U. S. Government Fund, Inc. as of May 31, 1994, and the
related statement of operations for the three-month period then ended and the
year ended February 28, 1994, the statement of changes in net assets for the
three-month period ended May 31, 1994 and each of the two years in the period
ended February 28, 1994, and the financial highlights for the three-month
period ended May 31, 1994 and each of the two years in the period ended
February 28, 1994, and for the period September 30, 1991 (commencement of
operations) to February 29, 1992. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial
highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of investments
owned as of May 31, 1994 by correspondence with the custodian. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
T. Rowe Price Adjustable Rate U. S. Government Fund, Inc. as of May 31, 1994,
the results of its operations, changes in its net assets and financial
highlights for each of the respective periods stated in the first paragraph in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND
Baltimore, Maryland
June 17, 1994
<PAGE>
SHAREHOLDER SERVICES
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 and services---at no extra cost.
TELEPHONE SERVICES
ACCESS YOUR ACCOUNT 24 HOURS A DAY BY CALLING 1-800-638-2587.
Tele*Access[registered trademark]---Gives you your account balance, date and
amount of your last transaction, latest dividend payment, and fund prices and
yields; lets you buy, sell, and exchange shares among identically registered
accounts and move assets between your bank and fund accounts.
SHAREHOLDER SERVICE REPRESENTATIVES ARE AVAILABLE FROM 8:00 A.M. TO 10:00
P.M., MONDAY-FRIDAY, AND SATURDAY AND SUNDAY FROM 9:00 A.M. TO 5:00 P.M., E.T.
CALL 1-800-225-5132.
Shareholder Service Center---Call to exchange shares or move money between
your bank and fund accounts.
ACCOUNT SERVICES
Checking---Write checks for $500 or more on any money market and most bond
fund accounts.
Automatic Investing---Build your account over time by investing directly
from your bank account or paycheck. A low, $50 minimum makes it easy to get
started.
Automatic Withdrawal---If you need money from your fund account on a regular
basis, you can establish scheduled, automatic redemptions.
Dividend and Capital Gains Payment Options---Reinvest all or some of your
distributions or take them in cash. We give you maximum flexibility and
convenience.
INVESTMENT INFORMATION
Combined Statement---A comprehensive overview of your T. Rowe Price
accounts. The summary page gives your earnings by tax category, provides total
portfolio value, and lists your investments by type-stock, bond, and money
market. Detail pages itemize account transactions by fund.
Quarterly Shareholder Reports---Portfolio managers review the performance of
the funds in plain language and discuss T. Rowe Price's economic outlook.
The T. Rowe Price Report---A quarterly newsletter with relevant articles on
market trends, personal financial planning, and T. Rowe Price's economic
perspective.
Insights---A library of information that includes reports on mutual fund tax
issues, investment strategies, and financial markets.
Detailed Investment Guides---Our widely acclaimed Asset Mix Worksheet,
College Planning Kit, Retirees Financial Guide, Retirement Planning Kit (also
available on disk for PC use) and Guide to Risk-Adjusted Performance can help
you determine and reach your investment goals.
DISCOUNT BROKERAGE
Trade stocks, bonds, options, and precious metals at substantial savings over
full-cost brokers.
Tele*Trade-Call this automated phone service after business hours to place
your orders.
Fax*Trade-Buy and sell by simply faxing your order.
Tele*Quote-Provides 24-hour access to stock and option quotes.
Money Fund Sweep Feature-Buy and sell securities and have your "sweep"
account automatically debited or credited. Dividend and interest payments are
credited daily.
If you have questions or would like to add a service to your account, please
call our Shareholder Service Center.
<PAGE>
T. ROWE PRICE NO-LOAD MUTUAL FUNDS
STABILITY
Prime Reserve
Summit Cash Reserves
U.S. Treasury Money
California Tax-Free Money
New York Tax-Free Money
Summit Municipal Money Market
Tax-Exempt Money
CONSERVATIVE INCOME
Adjustable Rate U.S. Government
Short-Term Bond
Short-Term Global Income
Summit Limited-Term Bond
U.S. Treasury Intermediate
Florida Insured Intermediate Tax-Free
Maryland Short-Term Tax-Free Bond
Summit Municipal Intermediate
Tax-Free Insured Intermediate Bond
Tax-Free Short-Intermediate
INCOME
Global Government Bond
GNMA
New Income
Spectrum Income
Summit GNMA
U.S. Treasury Long-Term
California Tax-Free Bond
Georgia Tax-Free Bond
Maryland Tax-Free Bond
New Jersey Tax-Free Bond
New York Tax-Free Bond
Summit Municipal Income
Virginia Tax-Free Bond
Tax-Free Income
AGGRESSIVE INCOME
High Yield
International Bond
Tax-Free High Yield
CONSERVATIVE
GROWTH
Balanced
Capital Appreciation
Dividend Growth
Equity Income
Equity Index
Growth & Income
Spectrum Growth
GROWTH
Blue Chip Stock
European Stock
Growth Stock
International Stock
Japan
Mid-Cap Growth
New Era
Small-Cap Value
AGGRESSIVE GROWTH
International Discovery
Latin America
New America Growth
New Asia
New Horizons
OTC
Science & Technology
Call if you want to know about any T. Rowe Price Fund. We'll send you a
prospectus with more complete information, including management fees and other
expenses. Read it carefully before you invest or send money.
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