<PAGE>
FELLOW SHAREHOLDERS
The environment for mortgage-backed securities took a turn for the better
during your Fund's final fiscal quarter ended February 28. The principal
reason was a drop in the mortgage prepayment rate which, in turn, reflected a
two-stage rise in interest rates, first in mid-autumn and then, of greater
significance, in February.
The Federal Reserve's early February announcement of a tightening in
monetary policy to forestall inflation - its first such action in five years -
stunned the financial markets and sent interest rates higher across the board.
While rising rates are a negative development for bonds, there is some
positive fallout for mortgage-backed securities. As rates rise, homeowners
have less incentive to refinance their mortgages and pay off their existing
ones at face (par) value. Since investors suffer a loss on any prepaid
mortgage originally purchased at a price over par, a decrease in prepayments
enhances the performance potential of mortgage-backed securities.
The one-year Treasury bill rate rose about 75 basis points during the Fund's
fiscal year, with most of the increase occurring in the final quarter. Your
Fund's yield paralleled this trend, but with a lag of about three months due
to the mortgage rate adjustment process. The Treasury bill's February yield
rise, shown in the graph, should be mirrored in the Fund's yield later in the
spring.
While the changing interest rate environment should benefit adjustable-rate
mortgage securities (ARMS) over time, supply and demand factors have recently
put downward pressure on prices. The supply of new ARMs has been unusually
large in recent months, and demand, particularly from mutual funds, has been
diminishing. Banks and insurance companies have stepped up their investments,
but they have not fully offset declining purchases from mutual funds.
YIELD COMPARISON GRAPH
[A line graph compares the Adjustable Rate U.S. Government Fund yield against
the 1-year Treasury bill yield from 2/28/93 to 2/28/94.]
PERFORMANCE AND STRATEGY REVIEW
The Fund's modest price declines for the three- and 12-month periods - 0.4%
and 1.7%, respectively - were more than offset by its income stream, so the
total returns were positive. The Fund had a small performance edge on its peer
group for the quarter and lagged marginally for the year.
Performance Comparison
Periods Ended 2/28/94
3 Months 12 Months
---------------------------------
Adjustable Rate U.S.
Government Fund 0.77% 3.11%
Lipper Average of Adjustable
Rate Mortgage Funds 0.63 3.17
- ------------------------------------------------------------------------
At 4.85%, the Fund's 12-month yield substantially exceeded the average money
fund yield of 2.7% for the same period (according to Donoghue's Money Fund
Average). Just as the typical trade-off for money fund price stability is a
modest income level, the trade-off for your Fund's more attractive income is
the possibility of modest price declines.
<PAGE>
Based on its yield and total return, your Fund fills a niche between a money
fund and a short-term bond fund on a risk/reward continuum. While income in
any given month may not offset a drop in share price, the accumulation of
income over a number of months should more than do so, as it has in the past.
For the 12 months ended February 28, the Fund's $0.08 share-price decline was
substantially exceeded by income of $0.23 per share.
Our strategy continued to reflect efforts to minimize principal fluctuation
while maintaining both income and the Fund's high credit quality. Among the
few changes in our major investment sectors, as listed in a table following
this report, was a reduction in our sizable exposure to GNMA ARMs over the
last quarter. Because these securities typically experience lower prepayments
than other ARMs, they were beneficial during the period of declining interest
rates. But with rates likely to rise further in 1994, we sought securities
with shorter durations and, therefore, less exposure to potential price
declines. (Duration is explained in the sidebar.)
Among new positions established during the quarter was a 3% allocation to
agency-backed stripped mortgages. (The components of a mortgage are stripped
away, so each can be bought separately.) One-third of this position consists
of interest-only securities, which should rise in price when rates rise, and
the balance are high-coupon, principal-only securities which we purchased at a
discount and expect to be paid off at par in the coming months. Because the
value of stripped mortgages is very sensitive to changes in interest rates, we
limit such investments to less than 5% of the portfolio.
Duration as a Guide to Interest Rate Risk
Duration is a measure that more accurately defines a bond's interest rate
sensitivity than maturity. Unlike maturity, which merely indicates when the
bond repays principal, "duration" incorporates the cash flows of all interest
and principal payments over the life of the bond to reflect the recovery of
your original investment. Future payments are discounted to reflect their
present value. These payments are then multiplied by the number of years they
will be received to produce a value that is expressed in years, i.e., the
duration.
You can multiply the duration by the potential change in interest rates to
estimate the change in principal value. For example, a bond with a duration of
five years would rise or fall roughly 5% in price if rates fell or rose by one
percentage point.
OUTLOOK
Our forecast is for gradually rising rates in 1994, as the economy moves
toward full capacity and hits labor and capital constraints. This creates a
mixed backdrop for ARMs. Rising rates mean some downward price pressure,
although the effect is greatly minimized for the Fund because of the
portfolio's very short maturity structure. On the positive side, prepayments
should continue to slow, as noted earlier, although we could well see a
renewed spurt this spring as mortgage bankers, who have geared up for high
volumes, strongly promote refinancing "before it's too late." Thus, our
near-term outlook is cautious.
Your Fund will continue to meet the needs of conservative investors who
desire a higher 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.
Respectfully submitted,
SIGNATURE
Peter Van Dyke
President and Chairman of the
Investment Advisory Committee
March 21, 1994
<PAGE>
STATISTICAL HIGHLIGHTS
T. ROWE PRICE ADJUSTABLE RATE U.S. GOVERNMENT FUND / FEBRUARY 28, 1994
Key Statistics
Dividend Yield* Periods Ended 2/28/94
- --------------------------------------------------- --------------------------
3 Months 4.84%
12 Months 4.85
Dividend Per Share
- ---------------------------------------------------
3 Months $0.06
12 Months 0.23
Change in Per-Share Value
- ---------------------------------------------------
3 Months (From $4.77 to $4.75) -$0.02
12 Months (From $4.83 to $4.75) -0.08
- ------------------------------------------------------------------------------
*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.
Income return and principal value represent past performance and will vary.
Shares may be worth more or less at redemption than at original purchase.
Quality Diversification
Percent of Net Assets
TRPA Quality Rating* 2/28/93 11/30/93 2/28/94
- ----------------------- ---------------- --------------- ----------------
1 80% 81% 81%
2 20 19 19
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
2/28/93 11/30/93 2/28/94
---------------- ---------------- ----------------
FNMA Adjustable
Rate Mortgages 46% 45% 43%
FHLMC Adjustable
Rate Mortgages 16 16 12
GNMA Adjustable
Rate Mortgages 7 20 9
Agency-Backed
Stripped Mortgages 0 0 3
U.S. Treasury Securities 7 0 2
FNMA 0 0 2
FHLMC Floating Rate Note 0 0 2
FNMA Floating Rate Note 0 0 2
GNMA Fixed Rate
Mortgages 3 4 1
Non - Government
Adjustable
Rate Mortgages 22 14 14
Non-Government Fixed
Rate Mortgages 0 8 9
Other Assets
Less Liabilities 1 7 1
- --------------------------------------------------------------------------
100% 100% 100%
- --------------------------------------------------------------------------
Index Diversification
Percent of
ARM Securities
2/28/93 11/30/93 2/28/94
-------------- ---------------- ------------
11th District Cost of
Funds Index (COFI) 37% 27% 26%
1-Year Constant
Maturity Treasury (CMT) 54 56 55
6-Month Treasury Bill 9 11 14
1-Month London Interbank
Offered Rate 0 6 5
- ----------------------------------------------------------------------------
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 2/28/94. 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
and
Fiscal Net Capital With Capital
Year Asset Income Gain Dividends Gains Total
Ended Value Dividends Distributions Reinvested Reinvested Return
- ---------- ------ --------- ------------- ----------- ----------- ---------
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
- -----------------------------------------------------------------------------
TOTAL $0.69 -
- -----------------------------------------------------------------------------
/1/From inception 9/30/91 to 2/29/92.
FISCAL-YEAR PERFORMANCE COMPARISON GRAPH
[A line graph compares the 2/28/94 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 Brothers 6-Month
T-Bill Index. At 2/28/94, the Fund investment would have been worth $10930 and
the Salomon Index investment would have been worth $10939.]
Calendar-Year Performance
Periods Ended December 31, 1993
Since Inception
1 Year (9/30/91)*
----------- -----------------
2.77% 3.87%
- ----------------------------------------------------------------------------
* 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.
Fiscal-Year Performance
Periods Ended February 28, 1994
Since Inception
1 Year (9/30/91)*
----------- -----------------------
3.12% 3.75%
- -----------------------------------------------------------------------------
* 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>
<TABLE>
PORTFOLIO OF INVESTMENTS (AMOUNTS IN THOUSANDS)
T. ROWE PRICE ADJUSTABLE RATE U.S. GOVERNMENT FUND / FEBRUARY 28, 1994
<CAPTION>
U.S. Government Agency Arm/1/ - 64.6%
Face Amount Value
------------- ------------
<S> <C> <C>
Federal Home Loan Mortgage,
1 Year CMT, resets annually, 5.408%-5.549%, 2/1/17-12/1/18........... $ 2,396 $ 2,494
7.234%, 5/1/20................................................... 1,226 1,299
resets semi-annually, 5.040%-5.518%, 11/1/18-7/1/29................ 14,480 15,007
COFI, resets annually, 6.096%, 4/1/18................................ 929 961
resets monthly, 5.070%-5.131%, 8/1/15-1/1/30....................... 5,662 5,756
resets semi-annually, 5.406%, 6/1/29............................... 1,814 1,876
Federal National Mortgage Assn.,
1 Year CMT, resets annually, 4.940%-5.188%, 10/1/14-6/1/27........... 14,996 15,540
5.200%-5.550%, 12/1/13-11/1/29................................... 28,639 29,513
5.600%-5.764%, 8/1/20-8/1/21..................................... 1,052 1,086
6.287%, 3/1/20................................................... 2,220 2,328
7.907%, 10/1/21.................................................. 1,008 1,063
resets semi-annually, 5.136%-5.332%, 10/1/18-10/1/19............... 2,180 2,272
6.164%-6.175%, 5/1/20-7/1/20..................................... 6,001 6,279
COFI, resets monthly, 5.070%-5.137%, 12/1/16-5/1/31.................. 4,282 4,373
5.487%-5.625%, 12/1/17-10/1/28................................... 7,401 7,613
6.817%, 10/1/14.................................................. 11 11
resets semi-annually, 5.125%-5.455%, 8/1/17-11/1/20................ 2,104 2,152
6 month CD Index, resets semi-annually, 4.806%, 11/1/21............ 385 397
6 month LIBOR, resets semi-annually, 4.405%, 5/1/21................ 1,623 1,664
6 month T-Bill Index, resets semi-annually, 4.998%-5.568%,
1/1/16-9/1/26.................................................... 19,297 20,057
6.061%-6.897%, 9/1/00-3/1/26..................................... 2,091 2,184
Government National Mortgage Assn.,
1 Year CMT, resets annually, 5.125%, 2/20/20......................... 786 803
5.000%-5.500%, 3/20/22-5/20/23..................................... 20,238 20,682
- ---------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AGENCY ARM (COST --$145,734) 145,410
Stripped Mortgage Securities - 2.7%
Federal Home Loan Mortgage, Principal Only, Zero Coupon, 11/15/22...... 4,000 3,930
Federal National Mortgage Assn., Interest Only, 7.500%, 11/1/23........ 6,650 2,120
- ---------------------------------------------------------------------------------------------------
TOTAL STRIPPED MORTGAGE SECURITIES (COST - $5,927) 6,050
U.S. Government Agency Floating Rate Notes - 3.8%
Federal Home Loan Mortgage, resets monthly, 4.038%, 3/15/23............ 4,359 4,359
Federal National Mortgage Assn., resets monthly, 4.038%, 3/25/08....... 4,219 4,220
- ---------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AGENCY FLOATING RATE NOTES (COST - $8,596) 8,579
Non-Government Agency Arm1 - 13.7%
Resolution Trust Corp., MPC,
COFI, resets annually, 5.268%, 1/25/27............................... 2,277 2,283
resets semi-annually, 5.108%, 7/25/20.............................. 4,899 4,896
5.343%, 2/25/21.................................................. 4,485 4,545
1 Year CMT, resets annually, 6.385%, 12/25/20........................ 765 795
4.86%, 11/15/20.................................................. 3,177 3,172
6 month T-Bill Index, resets monthly, 5.852%, 4/25/21................ 1,381 1,417
Ryland Mercury Savings Trust, MPC, COFI, resets semi-annually,
5.793%, 5/20/18...................................................... 955 960
Ryland Mortgage Securities, American Home Funding, MPC, COFI, resets
monthly, 5.65%, 3/25/17.............................................. 1,369 1,383
Salomon Brothers Mortgage Securities VII, MPC, COFI, resets monthly,
4.38%, 11/25/20...................................................... 8,305 8,305
Salomon Brothers Mortgage Securities, MPC, COFI, resets
semi-annually, 5.779%, 8/25/18....................................... 1,628 1,646
Western Federal Savings and Loan, MPC, COFI, resets semi-annually,
5.631%, 7/1/18....................................................... 1,419 1,433
- ---------------------------------------------------------------------------------------------------
TOTAL NON-GOVERNMENT AGENCY ARM (COST - $30,972) 30,835
Non-Government Agency CMO - 7.1%
Chase Mortgage Finance, 5.750%, 7/25/09................................ 10,275 10,172
Citicorp Mortgage Securities, 6.000%, 3/25/22.......................... 5,787 5,778
- ---------------------------------------------------------------------------------------------------
TOTAL NON-GOVERNMENT AGENCY CMO (COST - $16,238) 15,950
Other Asset-Backed Securities - 1.7%
HFC Home Equity Loan, 4.750%, 5/20/08 (Cost - $3,936).................. 3,944 3,921
U.S. Government Guaranteed Obligations - 1.0%
Government National Mortgage Assn., 11.500%, 3/15/10-12/15/15
(Cost - $2,290)...................................................... 2,000 2,305
U.S. Government Obligations - 2.2%
U.S. Treasury Bills, 3.10%, 3/3/94 (Cost - $4,999)..................... 5,000 4,998
U.S. Government Agency - 2.2%
Federal National Mortgage Assn., 3.25%, 3/8/94 (Cost - $4,995) ........ 5,000 4,994
- ---------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES - 99.0% OF NET ASSETS
(COST - $223,687)..................................................... $223,042
- ---------------------------------------------------------------------------------------------------
<FN>
/1/Rates disclosed are as of February 28, 1994.
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>
<PAGE>
Statement of Assets and Liabilities
T. Rowe Price Adjustable Rate U.S. Government Fund / February 28, 1994
Amounts in Thousands
--------------------
ASSETS
Investment in securities at value (Cost - $223,687).. $223,042
Receivable for investment securities sold............ 25,017
Other assets......................................... 4,999
--------
Total assets....................................... $253,058
LIABILITIES
Payable for investment securities purchased.......... 26,441
Other liabilities.................................... 1,463
--------
Total liabilities.................................. 27,904
--------
NET ASSETS CONSISTING OF:
Accumulated net realized gains/losses - net of
distributions...................................... (18,311)
Unrealized depreciation of investments............... (645)
Paid-in capital applicable to 47,373,459 shares 244,110
of $0.01 par value capital stock outstanding; ---------
1,000,000,000 shares authorized....................
NET ASSETS........................................... $225,154
--------
--------
NET ASSET VALUE PER SHARE....................... $4.75
--------
--------
- -----------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
<PAGE>
Statement of Operations
T. Rowe Price Adjustable Rate U.S. Government Fund / Year Ended February 28,
1994
Amounts in Thousands
------------------------
INVESTMENT INCOME
Interest income.................................... $16,889
Expenses
Investment management fees....................... $ 526
Shareholder servicing fees & expenses............ 443
Custodian and accounting fees & expenses......... 154
Registration fees & expenses..................... 59
Prospectus & shareholder reports................. 55
Legal & auditing fees............................ 26
Directors' fees & expenses....................... 11
Miscellaneous ................................... 29
---------
Total expenses................................... 1,303
---------
Net investment income.............................. 15,586
REALIZED AND UNREALIZED LOSS ON INVESTMENTS
Net realized loss.................................. (3,117)
Change in unrealized appreciation or depreciation.. (2,319)
---------
Net loss on investments............................ (5,436)
---------
INCREASE IN NET ASSETS FROM OPERATIONS............. $10,150
---------
---------
- ----------------------------------------------------------------------------
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
Year Ended Year Ended
Feb. 28, 1994 Feb. 28, 1993
------------- -------------
Amounts in Thousands
---------------------------
INCREASE (DECREASE) IN NET ASSETS
Operations
Net investment income......................... $ 15,586 $ 36,254
Net realized loss on investments.............. (3,117) (20,881)
Change in unrealized appreciation or
depreciation of investments................. (2,319) 2,901
------------ ------------
Increase in net assets from operations.......... 10,150 18,274
------------ ------------
Distributions to shareholders
Net investment income......................... (11,303) (34,588)
Tax return of capital......................... (4,132) (2,627)
------------ ------------
Decrease in net assets from distributions to
shareholders................................ (15,435) (37,215)
------------ ------------
Capital share transactions
Sold 17,922 and 157,289 shares ............... 86,042 778,109
Distributions reinvested of 2,877 and 5,491
shares...................................... 13,827 27,005
Redeemed 71,978 and 133,173 shares............ (345,878) (652,664)
------------ ------------
Increase (decrease) in net assets from capital
share transactions.......................... (246,009) 152,450
------------ ------------
Total increase (decrease)....................... (251,294) 133,509
NET ASSETS
Beginning of year............................. 476,448 342,939
------------ ------------
End of year................................... $225,154 $476,448
------------ ------------
------------ ------------
- ----------------------------------------------------------------------------
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 / February 28, 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.
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 - 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.
D) Accounting Change - Effective as of the beginning of the year, the Fund
adopted a recently issued accounting standard related to shareholder
distributions. This change resulted in a reclassification to paid-in-capital
of permanent differ- ences between tax and financial reporting of net
investment income and net realized gains/losses. The cumulative effect of this
change as of February 28, 1993, decreased Accumulated net investment income -
net of distributions by $1,202,000, increased Accumulated net realized
gains/losses - net of distributions by $3,844,000 and decreased
Paid-in-capital by $2,642,000. The results of operations, shareholder
distributions and net assets were not affected by this change.
NOTE 2 - PORTFOLIO TRANSACTIONS
Purchases and sales of U.S. Government securities, aggregated $198,887,000 and
$403,165,000, respectively, for the year ended February 28, 1994. Purchases
and sales of portfolio securities, other than short-term and U.S. Government
securities aggregated $32,384,000 and $84,405,000.
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 $18,007,000 at February 28, 1994, which
expire in 2001 through 2002.
At February 28, 1994, the aggregate cost of investments for federal income
tax and financial reporting purposes was $223,687,000 and net unrealized
depreciation aggregated $645,000, of which $698,000 related to appreciated
investments and $1,343,000 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 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 February 28, 1994, which would cause the
Fund's ratio of expenses to average net assets to exceed 0.40%. 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 0.40% in
any month, and that no such reimbursement shall be made to the Manager after
December 31, 1995. Pursuant to this agreement, $938,000 of management fees
were not accrued by the Fund for the year ended February 28, 1994.
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 year ended February 28, 1994, the Fund incurred fees totalling
approximately $469,000 for these services provided by related parties. At
February 28, 1994, investment management and service fees payable were
$56,000.
<PAGE>
Financial Highlights
T. Rowe Price Adjustable Rate U.S. Government Fund
<TABLE>
<CAPTION>
For a share outstanding throughout each
period
------------------------------------------
Sept. 30, 1991
Year Ended (Commencement
----------------------- of Operations) to
Feb. 28, Feb. 28, Feb. 29,
1994 1993 1992
---------- ----------- ------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD....... $4.83 $4.97 $5.00
------- ------- -------
Investment Activities
Net investment income.................... 0.23* 0.29* 0.16*
Net realized and unrealized loss......... (0.08) (0.13) (0.03)
------- ------- -------
Total from Investment Activities........... 0.15 0.16 0.13
Distributions
Net investment income.................... (0.17) (0.28) (0.16)
Tax return of capital.................... (0.06) (0.02) -
------- ------- -------
Total Distributions........................ (0.23) (0.30) (0.16)
------- ------- -------
NET ASSET VALUE, END OF PERIOD............. $4.75 $4.83 $4.97
------- ------- -------
------- ------- -------
- --------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Total Return............................... 3.11% 3.33% 2.58%
Ratio of Expenses to Average Net Assets.... 0.40%* 0.25%* 0.00%[dagger]*
Ratio of Net Investment Income to Average
Net Assets............................... 4.78% 5.96% 7.45%[dagger]
Portfolio Turnover Rate.................... 70.4% 110.8% 98.4%[dagger]
Net Assets, End of Period (in thousands)... $225,154 $476,448 $342,939
Number of Shareholder Accounts, End of
Period................................... 11,000 19,000 13,000
- --------------------------------------------------------------------------------------
<FN>
[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.
</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 assets and liabilities of T.
Rowe Price Adjustable Rate U. S. Government Fund, Inc., including the
portfolio of investments, as of February 28, 1994, and the related statement
of operations for the year then ended, the statement of changes in net assets
for each of the two years in the period then ended, and the financial
highlights for each of the two years in the period then ended 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 February 28, 1994, by correspondence with the custodian and
brokers. 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 February 28,
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
March 17, 1994
Officers & Directors
George J. Collins, Chairman Michael J. Conelius, Vice President
Peter Van Dyke, President/Director Henry H. Hopkins, Vice President
Heather R. Landon, Executive Vice President Veena A. Kutler, Vice President
Robert P. Black, Director James M. McDonald, Vice President
Calvin W. Burnett, Director Edmund Notzon, Vice President
Anthony W. Deering, Director Charles P. Smith, Vice President
F. Pierce Linaweaver, Director Lenora V. Hornung, Secretary
James S. Riepe, Vice President/Director Carmen F. Deyesu, Treasurer
John Sagan, Director David S. Middleton, Controller
John G. Schreiber, Director
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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.
TransactionLine[registered trademark] - Lets you purchase, exchange, or
redeem shares anytime.
SHAREHOLDER SERVICE REPRESENTATIVES ARE AVAILABLE FROM 8:00 A.M. TO 10:00
P.M., MONDAY-FRIDAY, AND SATURDAY 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, bond, or
tax-free fund account.
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.
