Annual Report
Short-Term
U.S. Government
Fund
May 31, 1999
T. Rowe Price
Report Highlights
- --------------------------------------------------------------------------------
Short-Term U.S. Government Fund
o Interest rates were volatile over the past year, first plunging because of
the global financial crisis, then rising as the U.S. economy remained
strong.
o The fund's 12-month return of 4.39% was in line with the Lipper average,
but six-month returns fell short due to our longer-than-average maturity.
o We continue to favor the strategy of boosting the fund's yield through the
purchase of mortgage-backed securities.
o At least one Federal Reserve rate hike is already reflected in bond prices,
and we do not expect a significant pickup in inflation.
Fellow Shareholders
Interest rates and bond prices were volatile over the past year, especially
among short-term and intermediate maturities and mortgage securities. Yields on
high-quality securities plunged last summer and fall in reaction to the global
financial crisis and three Federal Reserve rate cuts, then rose almost as
swiftly as the crisis passed, the U.S. economy remained strong, and global
economies appeared poised for recovery. While short-term bond funds provided
higher income than money market funds for the year ended May 31, their total
returns were hurt by price declines.
MARKET ENVIRONMENT
The last six months were virtually a mirror image of the prior six-month period.
The latter, as described in our last report, was favorable for your fund as
interest rates fell, pushing up the price of short-term securities. Mortgage
prepayments rose sharply as more and more homeowners took advantage of the lower
rates to refinance their mortgages. This trend, combined with heavy hedge fund
selling of mortgage pass-throughs at the height of the financial crisis, hurt
the mortgage market last year, but the fund owned certain structured
mortgage-backed securities that are designed to offer protection from
prepayments, and these performed well.
INTEREST RATE LEVELS
5-Year T-Note 2-Year T-Note 1-Year T-Note
Treasury Note Treasury Note Treasury Note
05/31/98 5.56 5.53 5.40
5.47 5.47 5.37
5.50 5.49 5.34
08/98 4.78 4.77 4.88
4.43 4.38 4.30
4.24 4.12 4.20
11/98 4.49 4.52 4.47
4.54 4.54 4.55
4.54 4.58 4.52
02/99 5.20 5.12 4.83
5.11 4.98 4.67
5.21 5.07 4.78
5/31/99 5.58 5.42 5.00
The more recent six-month period proved more challenging for the bond market as
the U.S. economy powered ahead. The Fed's timely actions helped restore
liquidity and confidence to world markets, and emerging market economies began
to stabilize. This set the stage for renewed growth and, unfortunately, higher
interest rates. From a level of 5.53% a year ago, the yield on the 2-year
Treasury note plunged to nearly 4% last fall, only to rise to 5.42% by May 31.
On May 18, the Fed announced that it had adopted a bias toward raising the key
federal funds target rate.
With interest rates ending the fund's fiscal year near where they started,
mortgage securities overcame a weak start and finished as the best performers in
the domestic bond market because of their higher yields and shorter duration.
(Duration is a measure of a bond fund's sensitivity to interest rates; for
example, a duration of two years means the fund's share price will rise or fall
about 2% for each one-percentage-point fall or rise in interest rates.)
Prepayment-protected mortgage securities did not fare as well in the recent
six-month period as they had in the prior period, because prepayment protection
is not needed when rates are rising, and the value of this protection falls.
The continuing federal budget surplus also had an important effect on short-term
interest rates. The Treasury is expected to pay down outstanding debt by $105
billion during the first half of 1999. While the surplus is a by-product of a
remarkably long and durable economic expansion, public debt reduction
significantly limits the supply of available investments in the marketplace.
With demand fairly steady, declining availability puts downward pressure on
yields.
PERFORMANCE AND STRATEGY REVIEW
Performance Comparison
- --------------------------------------------------------------------------------
Periods Ended 5/31/99 6 Months 12 Months
- --------------------------------------------------------------------------------
Short-Term
U.S. Government Fund 0.30% 4.39%
Lipper Average of Short
U.S. Government Funds 1.26 4.58
The fund's 12-month return of 4.39% roughly kept pace with the performance of
its Lipper peer group average, as shown in the nearby table. However, the
six-month return of 0.30% was short of the Lipper category's modest 1.26%
return. The fund's return was generated by income over the past six and 12
months, as the share price fell to $4.60 on May 31 from $4.65 a year ago and
$4.71 on November 30. Income fell slightly, from $0.27 per share for the 12
months ended May 31, 1998, to $0.25 over the past year, but more than offset the
share price decline. Over longer periods, the fund's returns compare favorably.
Its average annual returns of 5.99% and 5.68% for the three- and five-year
periods ended May 31, respectively, as shown on page 8, exceed the corresponding
5.55% and 5.53% returns of the Lipper Average of Short U.S. Government Funds for
the same periods.
The steep rise in interest rates over the past six months hurt your fund
disproportionately due primarily to our slightly longer duration. Another
negative effect on performance came from significant price volatility in some of
the fund's holdings of GNMA-backed project loans. For the past three years, the
fund has kept duration steady at a slightly-longer-than-neutral 2.3 years, which
served shareholders well in an era of declining rates. Recently, however, we
reduced duration to a neutral 2.2 years. For the time being, with at least one
Fed rate hike on the horizon, we have decided to maintain duration at this
level.
Over the past six months, we also reduced exposure to structured securities
called "principal only" strips (POs) from about 9% to 6% of net assets. These
securities are a type of collateralized mortgage obligation (CMO), from which
the investor receives only principal payments and no interest. The investor buys
a PO at a discount to par (or face value) based on the expected life of the
security. The faster the underlying mortgages are paid off, the sooner the PO
pays off at par, and thus the greater the investor's total return. We use these
types of instruments to protect against mortgage prepayments, since they perform
well when mortgages are refinanced faster than expected, and also to increase
the fund's yield. As a result of overall prepayments, our total mortgage
position was reduced from 77% of fund assets at the beginning of the period to
57%. The fund's Treasury position rose from 15% a year ago to 27%. Holdings of
very high-quality corporate bonds remained about the same, at 13% of assets. The
fund's average credit quality remains topnotch, at AAA.
Callout: The fund's average credit quality remains topnotch, at AAA.
Going forward, we will continue to prudently seek opportunities to enhance your
fund's yield by investing in mortgage pass-throughs, CMOs, and other
high-quality securities. To cushion volatility in interest rates, we will seek
securities that are protected against prepayments as well as those that are
protected against extension risk. (Extension risk is the flip side of prepayment
risk. Rising interest rates can cause a fund's average duration to lengthen
unexpectedly due to a drop in prepayments. This would further increase a fund's
sensitivity to rising rates and its potential for price declines.)
OUTLOOK
The U.S. economy, led by business investment and the American consumer, has been
the driver of world economic growth for the past two years. However, imbalances
have arisen that pose potential risks. Primary among these are the record trade
deficit, a negative personal saving rate, and job creation in excess of
population growth. These factors have reignited concern about the potential for
inflation and higher short-term interest rates. A Fed rate hike is widely
anticipated and has already been reflected in the bond market. Treasury bonds
now appear fairly priced, with yields more than a full percentage point above
last fall's lows. A second Fed rate hike in 1999 remains a possibility, but we
do not expect a significant increase in long-term interest rates from current
levels.
Callout: A Fed rate hike is widely anticipated and has already been reflected
in the bond market.
We expect the domestic economy to slow somewhat over the next six to 12 months,
though robust demand is likely to keep GDP growth above 3% (down from the recent
pace of better than 4%). Consumer spending shows some signs of waning from the
torrid pace of the last two quarters, but there is scant evidence of a
manufacturing slowdown. Though the consumer price index jumped a
higher-than-expected 0.7% in April, the index was unchanged in May. This and
other evidence suggests that inflation will remain under control.
An environment of rising interest rates poses risks to bond funds, but a
short-term, high credit-quality portfolio such as ours should still provide
attractive yields with limited volatility. We believe the Short-Term U.S.
Government Fund remains a solid vehicle for investors seeking
higher-than-money-market yields, very high credit quality, and modest share
price fluctuation.
Respectfully submitted,
William T. Reynolds
Director, Fixed Income Division
Connice A. Bavely
President and Chairman of the Investment Advisory Committee
June 21, 1999
- --------------------------------------------------------------------------------
Change in Management
Connice A. Bavely, a senior portfolio manager at T. Rowe Price Associates, has
been appointed chairman of the Short-Term U.S. Government Fund's Investment
Advisory Committee and has assumed day-to-day responsibility for the fund. She
succeeds Heather R. Landon, who left T. Rowe Price to pursue other
opportunities. Ms. Bavely, who joined the firm in February 1998 and has been
president of the Short-Term U.S. Government Fund since December of that year,
has 21 years of investment experience, including 12 years as a portfolio
manager. Prior to joining T. Rowe Price, she had been a founding partner and
senior vice president of Atlantic Asset Management Partners, LLC, since 1992.
Other members of the advisory committee for the fund include James M. McDonald,
Edmund M. Notzon III, William T. Reynolds, Daniel O. Shackelford, and Edward A.
Wiese.
The preceding updates the Short-Term U.S. Government Fund prospectus of October
1, 1998.
T. Rowe Price Short-Term U.S. Government Fund
- --------------------------------------------------------------------------------
Portfolio Highlights
- --------------------------------------------------------------------------------
KEY STATISTICS
11/30/98 5/31/99
- --------------------------------------------------------------------------------
Price Per Share $ 4.71 $ 4.60
Dividends Per Share
For 6 months 0.13 0.12
For 12 months 0.26 0.25
Dividend Yield *
For 6 months 5.51% 5.47%
For 12 months 5.77 5.62
30-Day Standardized Yield 4.92 4.69
Weighted Average Maturity (years) 3.0 3.0
Weighted Average Effective Duration (years) 2.3 2.2
Weighted Average Quality ** AAA AAA
* Dividends earned and reinvested for the periods indicated are annualized
and divided by the fund's net asset value per share at the end of the
period.
** Based on T. Rowe Price research.
T. Rowe Price Short-Term U.S. Government Fund
Portfolio Highlights
- --------------------------------------------------------------------------------
SECTOR DIVERSIFICATION
Percent of Percent of
Net Assets Net Assets
11/30/98 5/31/99
- --------------------------------------------------------------------------------
U.S. Government Mortgage-Backed Securities 64% 57%
U.S. Treasury Obligations 30 27
Corporate Bonds and Notes 13 8
Non-Government Mortgage-Backed Securities -- 5
All Other 2 2
Other Assets Less Liabilities -9 1
- --------------------------------------------------------------------------------
Total 100% 100%
T. Rowe Price Short-Term U.S. Government Fund
- --------------------------------------------------------------------------------
Performance Comparison
- --------------------------------------------------------------------------------
This chart shows the value of a hypothetical $10,000 investment in the fund over
the past 10 fiscal year periods or since inception (for funds lacking 10-year
records). The result is compared with a broad-based average or index. The index
return does not reflect expenses, which have been deducted from the fund's
return.
SHORT-TERM U.S. GOVERNMENT FUND
- --------------------------------------------------------------------------------
Salomon Salomon
Smith Barney Smith Barney
6-Month 2-Year Short-Term
Treasury Treasury U.S. Government
Bill Index Note Index Fund
9/30/91 10,000 10,000 10,000
5/92 10,318 10,562 10,440
5/93 10,680 11,325 10,682
5/94 11,038 11,554 10,823
5/95 11,637 12,426 11,488
5/96 12,299 13,035 11,983
5/97 12,961 13,896 12,810
5/98 13,666 14,843 13,670
5/99 14,344 15,493 14,270
Average Annual Compound Total Return
- --------------------------------------------------------------------------------
This table shows how the fund would have performed each year if its actual (or
cumulative) returns for the periods shown had been earned at a constant rate.
Since Inception
Periods Ended 5/31/99 1 Year 3 Years 5 Years Inception Date
- --------------------------------------------------------------------------------
Short-Term
U.S. Government Fund 4.39% 5.99% 5.68% 4.75% 9/30/91
Investment return and principal value represent past performance and will vary.
Shares may be worth more or less at redemption than at original purchase.
T. Rowe Price Short-Term U.S. Government Fund
Financial Highlights
- --------------------------------------------------------------------------------
For a share outstanding throughout each period
Year
Ended
5/31/99 5/31/98 5/31/97 5/31/96 5/31/95
NET ASSET VALUE
Beginning of period $ 4.65 $ 4.62 $ 4.59 $ 4.67 $ 4.65
Investment activities
Net investment income 0.25* 0.27* 0.28* 0 .28 0.26*
Net realized and
unrealized gain (loss) (0.05) 0.03 0.03 (0.08) 0.01
Total from
investment activities 0.20 0.30 0.31 0.20 0.27
Distributions
Net investment income (0.25) (0.27) (0.27) (0.27) (0.24)
Tax return of capital -- -- (0.01) (0.01) (0.01)
Total distributions (0.25) (0.27) (0.28) (0.28) (0.25)
NET ASSET VALUE
End of period $ 4.60 $ 4.65 $ 4.62 $ 4.59 $ 4.67
----------------------------------------------------
Ratios/Supplemental Data
Total return# 4.39%* 6.71%* 6.90%* 4.31%* 6.14%*
Ratio of total expenses
to average net assets 0.70%* 0.70%* 0.70%* 0.70%* 0.59%*
Ratio of net
investment income
to average net assets 5.42%* 5.88%* 6.05%* 5.93%* 5.48%*
Portfolio
turnover rate 145.3% 107.5% 82.9% 152.8% 100.0%
Net assets,
end of period
(in thousands) $134,227 $109,863 $ 92,697 $ 98,529 $112,387
# Total return reflects the rate that an investor would have earned on an
investment in the fund during each period, assuming reinvestment of all
distributions.
* Excludes expenses in excess of a 0.60% voluntary expense limitation in
effect through February 28, 1995, and a 0.70% voluntary expense limitation
in effect March 1, 1995 through May 31, 2000.
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Short-Term U.S. Government Fund
- --------------------------------------------------------------------------------
May 31, 1999
Statement of Net Assets Par/Shares Value
- --------------------------------------------------------------------------------
In thousands
U.S. GOVERNMENT MORTGAGE-BACKED
SECURITIES 57.2%
U.S. Government Agency ARM 2.1%
Federal National Mortgage Assn.
5.75%, 2/1- 7/1/18 $ 142 $ 141
5.763%, 3/1/20 110 110
5.769%, 12/1/17 - 11/1/20 398 397
5.81%, 3/1/18 25 25
5.812%, 12/1/16 - 7/1/27 564 562
5.83%, 5/1/24 98 97
5.842%, 3/1/19 10 10
5.858%, 5/1/17 - 5/1/31 421 420
5.875%, 11/1/17 57 56
5.905%, 1/1/19 753 750
6.00%, 8/1/17 44 43
6.68%, 11/1/21 123 125
6.817%, 10/1/14 10 10
2,746
U.S. Government Agency Obligations 47.5%
Federal Home Loan Banks,
6.25%, 10/15/20 5,880 5,829
Federal Home Loan Mortgage
6.50%, 6/1 - 7/1/99 256 257
7.00%, 8/1/01 892 904
8.00%, 2/1/00 9 9
7.75%, 8/15/21 2,571 2,647
5 year balloon
5.00%, 6/1/99 3 3
5.50%, 12/1/99 2 2
6.50%, 9/1/02 3,036 3,062
7.00%, 1/1/00 - 9/1/01 2,168 2,194
7 year balloon
6.50%, 12/1/99 - 12/1/03 3,253 3,267
7.00%, 1/1/00 454 456
REMIC
5.25%, 11/15/16 208 207
5.85%, 11/15/17 628 628
6.50%, 3/15/11 6,144 5,954
Federal National Mortgage Assn.
6.00%, 7/1 - 11/1/13 $ 2,410 $ 2,352
7 year balloon
7.00%, 6/1 - 9/1/03 4,269 4,357
7.50%, 8/1/01 127 129
REMIC
5.75%, 6/25/06 934 931
6.00%, 10/18/14 - 11/18/17 11,000 10,914
6.10%, 8/25/21 1,783 1,773
6.50%, 6/18/11 5,000 4,966
7.00%, 4/18/22 4,000 4,028
Principal Only, 9/25/00-9/25/23 9,320 8,721
Inverse Floater, VR, 13.838%, 6/25/99 190 190
63,780
U.S. Government Guaranteed Obligations 7.6%
Government National Mortgage Assn.
I, 11.50%, 3/15/10 - 12/15/15 1,713 1,941
REMIC
9.00%, 7/20/23 3,215 3,294
6.00%, 10/16/25 5,000 4,965
10,200
Total U.S. Government Mortgage-Backed Securities
(Cost $77,471) 76,726
U.S. GOVERNMENT OBLIGATIONS 27.1%
U.S. Treasury Obligations 27.1%
U.S. Treasury Notes
4.25%, 11/15/03 9,000 8,512
5.25%, 8/15/03 12,000 11,815
5.50%, 5/31/03 9,000 8,945
5.75%, 11/30/02 3,250 3,261
5.875%, 11/30/01 2,000 2,017
6.25%, 8/31/02 1,000 1,018
6.625%, 4/30/02 750 771
Total U.S. Government Obligations
(Cost $36,876) 36,339
CORPORATE BONDS AND NOTES 8.0%
Finance and Credit 2.7%
Associates Corp. N.A., MTN, 6.90%, 7/29/02 $ 3,600 $ 3,662
3,662
Home Equity Backed 2.9%
IMC Home Equity Loan Trust,
6.36%, 8/20/22 4,000 3,915
3,915
Investment Dealers 0.9%
Merrill Lynch, 8.00%, 2/1/02 1,220 1,271
1,271
Telephone 1.5%
Southwestern Bell Telephone,
6.375%, 4/1/01 2,000 2,016
2,016
Total Corporate Bonds and Notes
(Cost $10,982) 10,864
NON-GOVERNMENT ASSET-BACKED SECURITIES 5.0%
Non-Government Agency ARM 2.5%
Ciesco, MTN, (144a), 7.38%, 4/19/00 ! 3,250 3,257
Puget Sound Energy Conservation,
6.23%, 7/11/02 2,906 2,923
Ryland Mercury Savings Trust,
MPC, 6.351%, 10/15/18 307 306
Salomon Brothers Mortgage Securities,
MPC, 6.530%, 7/25/18 95 93
Total Non-Government Asset-Backed Securities
(Cost $6,586) 6,579
MONEY MARKET FUNDS 1.9%
Reserve Investment Fund, 4.96% # 2,594 2,594
Total Money Market Funds (Cost $2,594) 2,594
Total Investments in Securities
99.2% of Net Assets (Cost $134,509) $ 133,102
Other Assets Less Liabilities 1,125
NET ASSETS $ 134,227
----------
Net Assets Consist of:
Accumulated net investment income -
net of distributions $ (562)
Accumulated net realized gain/loss -
net of distributions (23,201)
Net unrealized gain (loss) (1,407)
Paid-in-capital applicable to 29,153,821
shares of $0.01 par value capital stock
outstanding; 1,000,000,000 shares authorized 159,397
NET ASSETS $ 134,227
----------
NET ASSET VALUE PER SHARE $ 4.60
----------
! Private Placement
# Seven-day yield
ARM Adjustable Rate Mortgage
Inverse Inverse floating rate note; interest rate is inversely tied to
Floater a published index-rate shown reflects current rate of 5/31/99.
MTN Medium Term Note
MPC Mortgage Pass-through Certificate
REMIC Real Estate Mortgage Investment Conduit
VR Variable Rate
144a Security was purchased pursuant to Rule 144a under the Securities Act
of 1933 and may not be resold subject to that rule except to qualified
institutional buyers-total of such securities at period-end amounts to
2.4% of net assets.
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Short-Term U.S. Government Fund
- --------------------------------------------------------------------------------
Statement of Operations
- --------------------------------------------------------------------------------
In thousands
Year
Ended
5/31/99
Investment Income
Interest income $ 7,985
Expenses
Investment management 457
Shareholder servicing 206
Custody and accounting 140
Prospectus and shareholder reports 45
Registration 35
Legal and audit 14
Proxy and annual meeting 7
Directors 6
Miscellaneous 3
Total expenses 913
Expenses paid indirectly (1)
Net expenses 912
Net investment income 7,073
Realized and Unrealized Gain (Loss)
Net realized gain (loss) on securities (280)
Change in net unrealized gain or loss on securities (1,543)
Net realized and unrealized gain (loss) (1,823)
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 5,250
---------
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Short-Term U.S. Government Fund
- --------------------------------------------------------------------------------
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
In thousands
Year
Ended
5/31/99 5/31/98
Increase (Decrease) in Net Assets
Operations
Net investment income $ 7,073 $ 5,933
Net realized gain (loss) (280) 377
Change in net unrealized gain or loss (1,543) 309
Increase (decrease) in
net assets from operations 5,250 6,619
Distributions to shareholders
Net investment income (7,016) (5,933)
Capital share transactions*
Shares sold 84,077 45,481
Distributions reinvested 6,135 5,060
Shares redeemed (64,082) (34,061)
Increase (decrease) in
net assets from capital
share transactions 26,130 16,480
Net Assets
Increase (decrease) during period 24,364 17,166
Beginning of period 109,863 92,697
End of period $ 134,227 $ 109,863
---------------------------------
*Share information
Shares sold 17,920 9,770
Distributions reinvested 1,311 1,087
Shares redeemed (13,684) (7,315)
Increase (decrease) in
shares outstanding 5,547 3,542
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Short-Term U.S. Government Fund
- --------------------------------------------------------------------------------
May 31, 1999
Notes to Financial Statements
- --------------------------------------------------------------------------------
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
T. Rowe Price Short-Term U.S. Government Fund, Inc. (the fund) is
registered under the Investment Company Act of 1940 as a diversified,
open-end management investment company and commenced operations on
September 30, 1991.
The accompanying financial statements are prepared in accordance with
generally accepted accounting principles for the investment company
industry; these principles may require the use of estimates by fund
management.
Valuation Debt securities are generally traded in the over-the-counter
market. Investments in securities with original 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 original maturities of 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.
Investments in mutual funds are valued at the closing net asset value per
share of the mutual fund on the day of valuation.
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.
Premiums and Discounts Premiums and discounts on debt securities, other
than mortgage-backed securities (MBS), are amortized for both financial
reporting and tax purposes. Premiums and discounts on all MBS are
recognized upon disposition or principal repayment as gain or loss for
financial reporting purposes. For tax purposes, premiums and discounts on
MBS acquired on or before June 8, 1997, are recognized upon disposition or
principal repayment as ordinary income. For MBS acquired after June 8,
1997, premiums are recognized as gain or loss; discounts are recognized as
gain or loss, except to the extent of accrued market discount.
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 the 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 and may differ from those determined in accordance with
generally accepted accounting principles. Expenses paid indirectly reflect
credits earned on daily, uninvested cash balances at the custodian, used to
reduce the fund's custody charges.
NOTE 2 - INVESTMENT TRANSACTIONS
Purchases and sales of portfolio securities, other than short-term and U.S.
government securities, aggregated $4,024,000 and $2,073,000, respectively,
for the year ended May 31, 1999. Purchases and sales of U.S. government
securities aggregated $208,229,000 and $194,616,000, respectively, for the
year ended May 31, 1999.
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 utilized capital loss carryforwards of
$245,000 in 1999. As of May 31,1999, the fund has capital loss
carryforwards for federal income tax purposes of $22,972,000, of which
$12,085,000 expires in 2000, $5,229,000 in 2001, $978,000 in 2002, and
$4,680,000 thereafter through 2005. The fund intends to retain gains
realized in future periods that may be offset by available capital loss
carryforwards.
In order for the fund's capital accounts and distributions to shareholders
to reflect the tax character of certain transactions, the following
reclassifications were made during the year ended May 31, 1999. The results
of operations and net assets were not affected by the increases/(decreases)
to these accounts.
---------------------------------------------------------------------------
Undistributed net investment income $ (89,000)
Undistributed net realized gain 296,000
Paid-in-capital (207,000)
At May 31, 1999, the cost of investments for federal income tax purposes
was substantially the same as for financial reporting and totaled
$134,509,000. Net unrealized loss aggregated $1,407,000 at period-end, of
which $302,000 related to appreciated investments and $1,709,000 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, of which $32,000 was payable at May 31, 1999. The fee is computed
daily and paid monthly, and consists 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 0.30% for assets in
excess of $80 billion. At May 31, 1999, and for the year then ended, the
effective annual group fee rate was 0.32%. The fund pays a pro-rata share
of the group fee based on the ratio of its net assets to those of the
group.
Under the terms of the investment management agreement, the manager is
required to bear any expenses through May 31, 2000, which would cause the
fund's ratio of total expenses to average net assets to exceed 0.70%.
Thereafter, through May 31, 2002, the fund is required to reimburse the
manager for these expenses, provided that average net assets have grown or
expenses have declined sufficiently to allow reimbursement without causing
the fund's ratio of total expenses to average net assets to exceed 0.70%.
Pursuant to this agreement, $92,000 of management fees were not accrued by
the fund for the year ended May 31, 1999. Additionally, $266,000 of
unaccrued management fees related to a previous expense limitation are
subject to reimbursement through May 31, 2000.
In addition, the fund has entered into agreements with the manager and two
wholly owned subsidiaries of the manager, pursuant to which the fund
receives certain other services. The manager computes the daily share price
and maintains the financial records of the fund. T. Rowe Price Services,
Inc. is the fund's transfer and dividend disbursing agent and provides
shareholder and administrative services to the fund. T. Rowe Price
Retirement Plan Services, Inc. provides subaccounting and recordkeeping
services for certain retirement accounts invested in the fund. The fund
incurred expenses pursuant to these related party agreements totaling
approximately $268,000 for the year ended May 31, 1999, of which $23,000
was payable at period-end.
The fund may invest in the Reserve Investment Fund and Government Reserve
Investment Fund (collectively, the Reserve Funds), open-end management
investment companies managed by T. Rowe Price Associates, Inc. The Reserve
Funds are offered as cash management options only to mutual funds and other
accounts managed by T. Rowe Price and its affiliates and are not available
to the public. The Reserve Funds pay no investment management fees.
Distributions from the Reserve Funds to the fund for the year ended May 31,
1999, totaled $294,000 and are reflected as interest income in the
accompanying Statement of Operations.
T. Rowe Price Short-Term U.S. Government Fund
- --------------------------------------------------------------------------------
Report of Independent Accountants
- --------------------------------------------------------------------------------
To the Board of Directors and Shareholders of
T. Rowe Price Short-Term U.S. Government Fund, Inc.
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position
of T. Rowe Price Short-Term U.S. Government Fund, Inc. (the "Fund") at May
31, 1999, and the results of its operations, the changes in its net assets
and the financial highlights for each of the fiscal periods presented, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these financial statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which
included confirmation of securities at May 31, 1999 by correspondence with
the custodian and brokers, provide a reasonable basis for the opinion
expressed above.
PricewaterhouseCoopers LLP
Baltimore, Maryland
June 17, 1999
T. Rowe Price Shareholder Services
- --------------------------------------------------------------------------------
Investment Services And Information
KNOWLEDGEABLE SERVICE REPRESENTATIVES
By Phone 1-800-225-5132 Available Monday through Friday from
8 a.m. to 10 p.m. ET and weekends from 8:30 a.m. to 5 p.m. ET.
In Person Available in T. Rowe Price Investor Centers.
ACCOUNT SERVICES
Checking Available on most fixed income funds ($500 minimum).
Automatic Investing From your bank account or paycheck.
Automatic Withdrawal Scheduled, automatic redemptions.
Distribution Options Reinvest all, some, or none of your distributions.
Automated 24-Hour Services Including Tele*Access(registered trademark) and
the T. Rowe Price Web site on the Internet. Address: www.troweprice.com
BROKERAGE SERVICES*
Individual Investments Stocks, bonds, options, precious metals, and other
securities at a savings over full-service commission rates.**
INVESTMENT INFORMATION
Combined Statement Overview of all your accounts with T. Rowe Price.
Shareholder Reports Fund managers' reviews of their strategies and results.
T. Rowe Price Report Quarterly investment newsletter discussing markets and
financial strategies.
Performance Update Quarterly review of all T. Rowe Price fund results.
Insights Educational reports on investment strategies and financial
markets.
Investment Guides Asset Mix Worksheet, College Planning Kit, Diversifying
Overseas: A Guide to International Investing, Personal Strategy Planner,
Retirees Financial Guide, and Retirement Planning Kit.
* T. Rowe Price Brokerage is a division of T. Rowe Price Investment Services,
Inc., Member NASD/SIPC.
** Based on a January 1999 survey for representative-assisted stock trades.
Services vary by firm, and commissions may vary depending on size of order.
For yield, price, last transaction,
current balance, or to conduct
transactions, 24 hours, 7 days
a week, call Tele*Access(registered trademark):
1-800-638-2587 toll free
For assistance
with your existing
fund account, call:
Shareholder Service Center
1-800-225-5132 toll free
410-625-6500 Baltimore area
To open a brokerage account
or obtain information, call:
1-800-638-5660 toll free
Internet address:
www.troweprice.com
T. Rowe Price Associates
100 East Pratt Street
Baltimore, Maryland 21202
This report is authorized for
distribution only to shareholders
and to others who have received
a copy of the prospectus appropriate
to the fund or funds covered in this
report.
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
4410 ArrowsWest Drive
Colorado Springs, CO 80907
Warner Center Plaza 5
Mezzanine Level
21800 Oxnard Street, Suite 270
Woodland Hills, CA 91367
Investment With Confidence(registered trademark)
T. Rowe Price
T. Rowe Price Investment Services, Inc., Distributor. F69-050 5/31/99
