Annual Report
Short-Term
U.S. Government
Fund
May 31, 2000
T. Rowe Price
Report Highlights
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Short-Term U.S. Government Fund
o The Federal Reserve raised interest rates repeatedly throughout the past
year, crimping returns on short-term bonds.
o Your fund posted modest returns in line with its benchmarks for the year,
but lagged in the past six months.
o Selected mortgage-backed, asset-backed, and corporate securities offer
attractive yields and high credit quality.
o The Fed seems to be achieving its goal of slowing the economy, but another
rate hike may still be on the horizon.
UPDATES AVAILABLE
For updates on T. Rowe Price funds following the end of each calendar quarter,
please see our Web site at www.troweprice.com.
Fellow Shareholders
Bond prices fell and interest rates rose during the past year due to persistent
strength in the U.S. economy, revived global growth, and mounting cost
pressures. The Federal Reserve raised its target for the key federal funds rate
six times over the past 12 months in an effort to slow U.S. growth and forestall
potential inflation. Bond funds-especially those with a short-term
focus-struggled to make headway in this environment. The Short-Term U.S.
Government Fund posted a modest total return comparable to its benchmarks in the
12 months ended May 31.
MARKET ENVIRONMENT
Interest Rate Levels
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2-Year 5-Year 1-Year
Treasury Note Treasury Note Treasury Bill
5/31/99 5.35 5.51 4.93
5.61 5.76 5.11
5.59 5.75 5.07
8/99 5.61 5.71 5.19
5.66 5.81 5.24
5.92 6.09 5.51
11/99 5.96 6.03 5.65
6.22 6.33 5.95
6.48 6.63 6.17
2/00 6.54 6.59 6.22
6.57 6.42 6.30
6.53 6.42 6.19
5/31/00 6.77 6.65 6.28
The past year was volatile for the financial markets, which had to contend with
a number of unusual factors including the white-hot economy and the Fed's
aggressive efforts to cool it off. Robust demand for goods and services in the
U.S. combined with a recovery of demand overseas raised concern within the Fed
and elsewhere that the domestic economy could overheat and revive inflation. In
the first quarter of 2000, GDP grew at an annual rate of 5.4%, while the jobless
rate, currently at 4.1%, hovered near 30-year lows. Foreign demand for U.S.
exports grew 8% in the first quarter compared with the year-earlier period,
while forecasts for growth outside the U.S. are at their highest levels in
years. To date, inflation has risen only modestly from the extremely low levels
registered in large part due to the overseas economic and financial crises of
1997-98. The consumer price index rose 3.1% in May compared with May 1999.
Excluding the volatile food and energy components, core CPI rose just 2.4% for
the month compared with the year-earlier period.
The Fed increased the federal funds rate 1.75 percentage points, to 6.5%, during
the year-above the peak target set during the Fed's last tightening cycle, which
ended in 1995. With the economy showing few signs of deceleration after five
quarter-point rate hikes, the central bank increased rates a half point on May
16. Short-term bonds invariably suffer when the Fed increases interest costs.
Data released in late May and early June, however, did suggest a slowing
economy, and investors began to feel that the Fed was nearing the end of its
rate-hike program.
Against this backdrop, Treasury issuance plunged, and in fact, the Treasury
Department began a $30 billion debt repurchase program in early 2000. Several
years of greater-than-expected federal budget surpluses had made it possible to
reduce the supply of Treasury debt. As a result, the 30-year Treasury bond yield
peaked in mid-January at about 6.75%, well before any letup to Fed rate hikes
was in sight. The yield fell as low as 5.69% in early April, as market
participants feared a shortage of long-term Treasuries. By the end of the
period, the 30-year Treasury bond yielded 6.00%, up only modestly from the 5.80%
level on May 31, 1999. Yields on short-term Treasuries rose far more during the
year, with the 1-year Treasury bill yield rising 1.35 percentage points to
6.28%, as shown in the chart on page 1. The Treasury yield curve inverted as a
result, with short-term securities yielding more than long-term bonds. (The
yield curve is a line plotting the yields on bonds from short to long
maturities.) Two-year Treasury note yields increased 1.42 percentage points to
6.77%, higher even than 5-year yields. These developments were not positive for
short-term debt funds since bond prices fall as yields rise. For the first time
in recent history, the Treasury yield curve inversion occurred in response to a
reduction in outstanding Treasury debt, rather than to concerns about economic
slowing as is normally the case.
Mortgage performance was mixed: rates rose during the period but eased off after
reaching two-year highs in February. Mortgage- and asset-backed securities were
the top-performing sectors outside of Treasuries over the past year and six
months.
PERFORMANCE AND STRATEGY REVIEW
Performance Comparison
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Periods Ended 5/31/00 6 Months 12 Months
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Short-Term
U.S. Government Fund 1.35% 3.23%
Salomon Smith Barney 2-Year
Treasury Note Index 1.63 3.26
Lipper Average of Short
U.S. Government Funds 1.98 3.49
In a difficult environment for short-term bonds, your fund posted modest total
returns for the 6- and 12-month periods ended May 31, 2000. Results were
comparable to the benchmarks for the year, but fell short for the six months.
Your returns were provided entirely by dividend income over both periods. As a
result of rising interest rates, the fund's share price declined $0.11 during
the year, from $4.60 to $4.49 at the end of the period. Rising dividend income
per share of $0.26 (up a penny from the year ended May 31, 1999) overcame the
decline in net asset value. The fund's six-month dividend yield rose to 5.87%
from 5.51% on November 30.
Although we entered the latest six-month period with a duration we consider
neutral versus our peers (2.2 years), we reduced duration even further as the
period progressed. (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.) Unfortunately, we did not move quickly enough to reduce
interest rate sensitivity, and this hurt performance.
The silver lining in an environment of sharply rising short-term interest rates,
of course, is rising income for shareholders. During the past six months, we
positioned the portfolio in high-quality instruments that offer attractive yield
advantages over Treasuries and reliable payment streams. Meanwhile, we
significantly reduced the fund's allocation to Treasuries during the period, as
reflected in the decline of U.S. government obligations from 25% to 16% as of
May 31, shown in the table on page 6. Exposure to mortgage-backed securities
remained steady at 50%, and within that sector we are focused on collateralized
mortgage obligations (CMOs) that are protected against prepayment risk. (CMOs
are securities backed by pools of mortgages. When homeowners refinance, they pay
off their existing mortgages and replace them with lower interest mortgages. In
substantial numbers, homeowner refinancing, or prepayment, can hurt the value of
mortgage-backed securities by reducing their yields. Certain types of CMOs are
structured so that their payment streams are buffered against prepayments.) In
addition, we also emphasized securities backed by commercial mortgages, which
are less interest rate sensitive than residential mortgages.
The fund's exposure to asset-backed securities also rose during the past six
months, to 18% from 11%. Structured securities backed by credit card debt and
automobile loans offer top-quality credit ratings (AAA) and yet have yields well
in excess of AAA corporate short-term debt. These instruments also have high
liquidity, meaning they can be bought and sold easily with minimal impact on
their prices. We also own some floating-rate securities backed by credit cards.
The floating-rate feature causes these instruments to increase their coupon
payments when interest rates rise, thus increasing their total returns.
Going forward, we plan to retain our defensive duration posture as we feel the
Fed will probably increase rates at least once more before year-end. We continue
to look for added value in the mortgage, corporate, and asset-backed sectors and
to focus on highly liquid securities.
OUTLOOK
The economic environment may continue to provide some surprises for fixed-income
investors, but we believe the Fed is well on its way toward successfully
orchestrating a soft landing. Economic data released in late May and early June
suggest that GDP is set to slow in the second quarter, after growing at an
amazingly fast clip the previous three quarters, and that upward pressure on
wages and other costs appears to be peaking. Unemployment even rose two-tenths
of a percentage point in May, albeit from historic lows. A slowdown in the
economy does not necessarily signal lower rates soon. Even a 4% annualized GDP
growth rate would be high by historical standards, and lower rates could quickly
reignite stock market exuberance and fuel economic activity. With this in mind,
we continue to focus on sector and security selection while remaining cautious
on the overall direction of interest rates.
We expect economic growth to moderate and inflation to remain stable. The
combination of sound fiscal policy, as reflected in the federal budget surplus,
and effective monetary policy suggests reduced upward pressure on interest rates
going forward. At current levels, selected short-term mortgage- and asset-backed
securities offer highly attractive yields and the prospect of strong total
returns with limited risk in the years ahead.
Thank you for investing with T. Rowe Price.
Respectfully submitted,
Connice A. Bavely
President and Chairman of the Investment Advisory Committee
June 23, 2000
T. Rowe Price Short-Term U.S. Government Fund
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Portfolio Highlights
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Key Statistics
11/30/99 5/31/00
Price Per Share $ 4.56 $ 4.49
Dividends Per Share
For 6 months 0.12 0.13
For 12 months 0.25 0.26
Dividend Yield *
For 6 months 5.51% 5.87%
For 12 months 5.59 5.81
30-Day Standardized Yield 5.69 6.48
Weighted Average Maturity (years) 2.6 2.3
Weighted Average Effective Duration (years) 2.2 1.7
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.
Sector Diversification
Percent of Percent of
Net Assets Net Assets
11/30/99 5/31/00
Mortgage-Backed Securities 50% 50%
Asset-Backed Securities 11 18
U.S. Government Obligations 25 16
Short-Term Obligations 7 10
Corporate Bonds and Notes 7 6
Other Assets Less Liabilities -- --
Total 100% 100%
T. Rowe Price Short-Term U.S. Government Fund
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Performance Comparison
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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 benchmarks, which may include a
broad-based market index and a peer group average or index. Market indexes do
not include expenses, which are deducted from fund returns as well as mutual
fund averages and indexes.
SHORT-TERM U.S. GOVERNMENT FUND
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Salomon Smith Barney
2-Year Treasury Short-Term Fund
Note Index U.S. Government Fund
9/30/91 10,000 10,000
5/92 10,562 10,440
5/93 11,325 10,682
5/94 11,554 10,823
5/95 12,426 11,488
5/96 13,035 11,983
5/97 13,896 12,810
5/98 14,843 13,670
5/99 15,493 14,270
5/00 15,998 14,731
Average Annual Compound Total Return
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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 5/31/00 1 Year 3 Years 5 Years Inception Date
Short-Term U.S.
Government Fund 3.23% 4.77% 5.10% 4.57% 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
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Financial Highlights For a share outstanding throughout each period
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Year
Ended
5/31/00 5/31/99 5/31/98 5/31/97 5/31/96
NET ASSET VALUE
Beginning of period $ 4.60 $ 4.65 $ 4.62 $ 4.59 $ 4.67
Investment activities
Net investment
income(osss) 0.26* 0.25* 0.27* 0.28* 0.28*
Net realized and
unrealized gain (loss) (0.11) (0.05) 0.03 0.03
Total from
investment activities 0.15 0.20 0.30 0.31 0.20
Distributions
Net investment income (0.26) (0.25) (0.27) (0.27) (0.27)
Tax return of capital -- -- -- (0.01) (0.01)
Total distributions (0.26) (0.25) (0.27) (0.28) (0.28)
NET ASSET VALUE
End of period $ 4.49 $ 4.60 $ 4.65 $ 4.62 $ 4.59
----------------------------------------------------
Ratios/Supplemental Data
Total return(diamond) 3.23%* 4.39%* 6.71%* 6.90%* 4.31%*
Ratio of total expenses
to average net assets 0.70%* 0.70%* 0.70% 0.70% 0.70%*
Ratio of net investment
income (loss) to average
net assets 5.60%* 5.42%* 5.88%* 6.05%* 5.93%*
Portfolio turnover rate 54.7% 145.3% 107.5% 82.9% 152.8%
Net assets,
end of period
(in thousands) $123,499 $134,227 $109,863 $ 92,697 $ 98,529
(diamond) 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 0.70% voluntary expense limitation in
effect through 5/31/00.
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Short-Term U.S. Government Fund
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May 31, 2000
Statement of Net Assets Par/Shares Value
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In thousands
U.S. GOVERNMENT MORTGAGE-BACKED
SECURITIES 45.1%
U.S. Government Agency ARM 1.7%
Federal National Mortgage Assn.
5.875%, 8/1/17 $ 42 $ 41
6.125%, 11/1/17 55 54
6.149%, 3/1/19 7 7
6.151%, 5/1/17 - 5/1/31 854 830
6.21%, 3/1/18 22 21
6.217%, 12/1/16 - 7/1/27 479 464
6.227%, 5/1/24 86 83
6.244%, 3/1/20 63 62
6.25%, 6/1 - 7/1/18 118 115
6.252%, 12/1/17 - 11/1/20 280 272
6.817%, 10/1/14 9 9
7.93%, 11/1/21 121 121
2,079
U.S. Government Agency Obligations 34.8%
Federal Home Loan Mortgage
7.75%, 8/15/21 1,847 1,837
5 year balloon
6.50%, 9/1/02 2,302 2,262
7.00%, 9/1/01 1,230 1,221
7 year balloon
6.50%, 8/1 - 12/1/03 1,483 1,435
7.00%, 8/1/01 600 596
REMIC
5.60%, 1/15/08 2,000 1,960
5.75%, 6/15/10 1,877 1,840
5.85%, 11/15/17 48 48
Federal National Mortgage Assn
6.00%, 7/1/13 - 11/18/17 7,193 6,896
7 year balloon
7.00%, 6/1 - 9/1/03 3,080 3,007
7.50%, 8/1/01 88 88
Federal National Mortgage Assn.
REMIC
5.75%, 6/25/06 $ 212 $ 211
6.00%, 10/18/14 - 5/18/17 6,000 5,843
6.10%, 8/25/21 1,205 1,180
6.50%, 6/18/11 5,000 4,814
7.00%, 4/18/22 4,000 3,961
Principal Only, 9/25/00 - 10/25/03 5,193 4,503
Inverse Floater, VR, 6.243%, 10/25/21 1,359 1,264
42,966
U.S. Government Guaranteed Obligations 8.6%
Government National Mortgage Assn.
I
7.00%, 9/15/12 1,919 1,871
11.50%, 3/15/10 - 12/15/15 1,321 1,450
REMIC
6.00%, 10/16/25 5,000 4,733
9.00%, 7/20/23 2,585 2,592
10,646
Total U.S. Government Mortgage-Backed
Securities (Cost $57,667) 55,691
NON-GOVERNMENT ASSET-BACKED
SECURITIES 22.6%
Auto-Backed 7.7%
BMW Vehicle Owner Trust,
6.54%, 4/25/04 1,250 1,226
CIT RV Trust, 6.35%, 4/15/11 1,500 1,487
Ford Credit Auto Owner Trust,
6.40%, 10/15/02 1,300 1,287
MMCA Automobile Trust,
6.80%, 8/15/03 1,500 1,494
Nissan Auto Receivables,
7.17%, 8/15/04 1,000 994
Onyx Acceptance Auto Trust,
6.76%, 5/15/04 2,000 1,970
WFS Financial Owner Trust,
7.41%, 9/20/07 1,000 990
9,448
Commercial Mortgage Backed 2.2%
GMAC Commercial Mortgage Securities,
6.15%, 5/15/35 1,804 1,714
Prudential Securities, 6.074%, 1/15/08 1,108 1,039
2,753
Credit Card-Backed 5.1%
Circuit City Credit Card Master Trust,
6.753%, 2/15/06 $ 1,500 $ 1,500
Prime Credit Card Master Trust,
6.75%, 11/15/05 2,000 1,977
Wachovia Credit Card Master Trust,
6.673%, 8/15/06 1,300 1,298
World Financial Network Credit Master Trust,
6.8525%, 7/15/06 1,500 1,499
6,274
Home Equity Loans-Backed 2.5%
EQCC Home Equity Loan Trust,
6.159%, 4/15/08 2,020 1,924
Saxon Asset Securities Trust,
6.73%, 2/25/27 1,207 1,164
3,088
Miscellaneous Receivables 1.1%
Puget Sound Energy Conservation,
6.23%, 7/11/02 1,410 1,386
1,386
Receivables-Backed 3.1%
Advanta Equipment Receivables,
7.56%, 2/15/07 840 836
Case Equipment Loan Trust,
5.77%, 8/15/05 1,500 1,441
Heller Equipment Asset Trust,
6.65%, 3/14/04 1,500 1,485
3,762
Stranded Asset 0.8%
Peco Energy Transition Trust,
6.4475%, 3/1/06 1,000 998
998
Whole Loans Backed 0.1%
Ryland Mercury Savings Trust,
6.114%, 10/25/18 181 180
180
Total Asset-Backed Securities (Cost $28,204) 27,889
U.S. GOVERNMENT OBLIGATIONS/AGENCIES 16.1%
U.S. Government Guaranteed Obligations 2.3%
Federal Home Loan Mortgage, Deb.,
5.50%, 5/15/02 3,000 2,902
2,902
U.S. Treasury Obligations 13.8%
U.S. Treasury Inflation-Indexed Notes,
3.625%, 7/15/02 8,010 7,941
U.S. Treasury Notes
5.75%, 11/30/02 1,350 1,320
6.625%, 4/30/02 7,750 7,729
16,990
Total U.S. Government Obligations/Agencies
(Cost $20,158) 19,892
CORPORATE BONDS AND NOTES 5.5%
Finance and Credit 1.3%
Associates Corp., MTN,
6.90%, 7/29/02 $ 1,600 $ 1,578
1,578
Investment Dealers 1.0%
Merrill Lynch, 8.00%, 2/1/02 1,220 1,225
1,225
Retail 1.6%
Wal-Mart Stores, Sr. Notes,
6.15%, 8/10/01 2,000 1,974
1,974
Telephone 1.6%
Southwestern Bell Telephone,
6.375%, 4/1/01 2,000 1,982
1,982
Total Corporate Bonds and Notes (Cost $6,880) 6,759
SHORT-TERM INVESTMENTS 10.3%
Certificates of Deposit 2.4%
Bank of Montreal, 6.38%, 6/8/00 1,000 1,000
National Westminster Bank,
7.26%, 5/9/01 1,000 999
Norddeutsche Landesbank,
7.30%, 5/11/01 1,000 999
2,998
Commercial Paper 0.8%
Santander Finance, 6.34%, 6/5/00 1,000 999
999
Money Market Funds 7.1%
Government Reserve Investment Fund,
6.08% # 8,770 8,770
8,770
Total Short-Term Investments (Cost $12,769) 12,767
Total Investments in Securities
99.6% of Net Assets (Cost $125,678) $ 122,998
Other Assets Less Liabilities 501
NET ASSETS $ 123,499
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Net Assets Consist of:
Accumulated net investment income -
net of distributions $ (562)
Accumulated net realized gain/loss -
net of distributions (13,038)
Net unrealized gain (loss) (2,680)
Paid-in-capital applicable to 27,491,527
shares of $0.01 par value capital stock
outstanding; 1,000,000,000 shares authorized 139,779
NET ASSETS $ 123,499
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NET ASSET VALUE PER SHARE $ 4.49
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# Seven-day yield
ARM Adjustable Rate Mortgage
Inverse Floater Inverse floating rate note; interest rate is inversely
tied to a published index - rate shown reflects current rate
as of 5/31/00.
MTN Medium Term Note
REMIC Real Estate Mortgage Investment Conduit
VR Variable Rate
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Short-Term U.S. Government Fund
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Statement of Operations
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In thousands
Year
Ended
5/31/00
Investment Income (Loss)
Interest income $ 8,175
Expenses
Investment management 474
Shareholder servicing 216
Custody and accounting 133
Prospectus and shareholder reports 41
Registration 18
Legal and audit 17
Directors 6
Miscellaneous 4
Total expenses 909
Expenses paid indirectly (3)
Net expenses 906
Net investment income (Loss) 7,269
Realized and Unrealized Gain (Loss)
Net realized gain (loss) on securities (1,922)
Change in net unrealized gain or loss on securities (1,273)
Net realized and unrealized gain (loss) (3,195)
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 4,074
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The accompanying notes are an integral part of these financial statements.
T. Rowe Price Short-Term U.S. Government Fund
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Statement of Changes in Net Assets
--------------------------------------------------------------------------------
In thousands
Year
Ended
5/31/00 5/31/99
Increase (Decrease) in Net Assets
Operations
Net investment income (loss) $ 7,269 $ 7,073
Net realized gain (loss) (1,922) (280)
Change in net unrealized gain or loss (1,273) (1,543)
Increase (decrease) in
net assets from operations 4,074 5,250
Distributions to shareholders
Net investment income (7,269) (7,016)
Capital share transactions *
Shares sold 60,745 84,077
Distributions reinvested 6,392 6,135
Shares redeemed (74,670) (64,082)
Increase (decrease) in net
assets from capital
share transactions (7,533) 26,130
Net Assets
Increase (decrease) during period (10,728) 24,364
Beginning of period 134,227 109,863
End of period $ 123,499 $ 134,227
-----------------------
*Share information
Shares sold 13,382 17,920
Distributions reinvested 1,407 1,311
Shares redeemed (16,451) (13,684)
Increase (decrease) in
shares outstanding (1,662) 5,547
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Short-Term U.S. Government Fund
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May 31, 2000
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 fund seeks the highest current income consistent
with minimal share price fluctuation by investing primarily in a
diversified portfolio of short-term U.S. government-backed securities.
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 and are
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 $29,505,000 and $14,444,000,
respectively, for the year ended May 31, 2000. Purchases and sales of U.S.
government securities aggregated $35,233,000 and $67,913,000, respectively,
for the year ended May 31, 2000.
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. As of May 31, 2000, the fund has capital loss
carryforwards for federal income tax purposes of $12,047,000, of which
$5,229,000 expires in 2001, $978,000 in 2002, and $5,840,000 thereafter
through 2008. 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, primarily the
expiration of capital loss carryforwards, the following reclassifications
were made during the year ended May 31, 2000. The results of operations and
net assets were not affected by the increases/(decreases) to these
accounts.
--------------------------------------------------------------------------------
Undistributed net realized gain $12,085,000
Paid-in-capital (12,085,000)
At May 31, 2000, the cost of investments for federal income tax purposes
was substantially the same as for financial reporting and totaled
$125,678,000. Net unrealized loss aggregated $2,680,000 at period-end, of
which $110,000 related to appreciated investments and $2,790,000 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 $39,000 was payable at May 31, 2000. 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 0.295% for assets
in excess of $120 billion. At May 31, 2000, 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, $69,000 of management fees were not accrued by
the fund for the year ended May 31, 2000, and $92,000 of management fees
remain unaccrued from a prior period.
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 $275,000 for the year ended May 31, 2000, of which $28,000
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,
2000, totaled $592,000 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, 2000, 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 accounting principles generally accepted in the United
States. 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 auditing standards generally accepted in the
United States, 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, 2000 by correspondence with the
custodian, provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Baltimore, Maryland
June 19, 2000
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 September 1999 survey for representative-assisted stock
trades. Services vary by firm, and commissions may vary depending on
size of order.
For fund and account information
or to conduct transactions,
24 hours, 7 days a week
By touch-tone telephone
Tele*Access 1-800-638-2587
By Account Access on the Internet
www.troweprice.com/access
For assistance
with your existing
fund account, call:
Shareholder Service Center
1-800-225-5132
To open a brokerage account
or obtain information, call:
1-800-638-5660
Internet address:
www.troweprice.com
Plan Account Lines for retirement
plan participants:
The appropriate 800 number appears
on your retirement account statement.
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.
Walk-In Investor Centers:
For directions, call 1-800-225-5132
or visit our Web site
Baltimore Area
Downtown
101 East Lombard Street
Owings Mills
Three Financial Center
4515 Painters Mill Road
Boston Area
386 Washington Street
Wellesley
Colorado Springs
4410 ArrowsWest Drive
Los Angeles Area
Warner Center
21800 Oxnard Street, Suite 270
Woodland Hills
Tampa
4200 West Cypress Street
10th Floor
Washington, D.C.
900 17th Street N.W.
Farragut Square
T. Rowe Price, Invest With Confidence
T. Rowe Price Investment Services, Inc., Distributor. F69-050 5/31/00
