PAGE 1
Prospectus for the T. Rowe Price Blue Chip Growth Fund, Inc., dated February
25, 1994, should be inserted here.
Prospectus
TO OPEN AN ACCOUNT:
INVESTOR SERVICES
1-800-638-5660
547-2308 IN BALTIMORE
YIELDS & PRICES:
TELE*ACCESS(REGISTERED TRADEMARK)
24 HOURS, 7 DAYS A WEEK
1-800-638-2587
625-7676 IN BALTIMORE
EXISTING ACCOUNT:
SHAREHOLDER SERVICES
1-800-225-5132
625-6500 IN BALTIMORE
INVESTOR CENTERS:
101 EAST LOMBARD STREET
FIRST FLOOR
BALTIMORE, MARYLAND
FARRAGUT SQUARE
FIRST FLOOR
900 17TH STREET, NW
WASHINGTON, DC
T. ROWE PRICE FINANCIAL CENTER
FIRST FLOOR
10090 RED RUN BOULEVARD
OWINGS MILLS, MARYLAND
ARCO TOWER
31ST FLOOR
515 SOUTH FLOWER STREET
LOS ANGELES, CALIFORNIA
Blue Chip Growth
Fund
February 25, 1994
BLUE CHIP
GROWTH FUND
PROSPECTUS
FEBRUARY 25, 1994
T. ROWE PRICE
BLUE CHIP GROWTH FUND, INC.
TABLE OF CONTENTS
FUND INFORMATION
INVESTMENT OBJECTIVES AND PROGRAM. . . . . . . . . . 2
SUMMARY OF FUND FEES AND EXPENSES. . . . . . . . . . 3
FINANCIAL HIGHLIGHTS . . . . . . . . . . . . . . . . 4
INVESTMENT POLICIES AND RISK
CONSIDERATIONS. . . . . . . . . . . . . . . . . 4
PERFORMANCE INFORMATION. . . . . . . . . . . . . . . 6
CAPITAL STOCK. . . . . . . . . . . . . . . . . . . . 7
NAV, PRICING, AND EFFECTIVE DATE . . . . . . . . . . 7
RECEIVING YOUR PROCEEDS. . . . . . . . . . . . . . . 8
DIVIDENDS AND DISTRIBUTIONS. . . . . . . . . . . . . 8
TAXES. . . . . . . . . . . . . . . . . . . . . . . . 8
MANAGEMENT OF THE FUND . . . . . . . . . . . . . . . 9
EXPENSES AND MANAGEMENT FEE. . . . . . . . . . . . . 9
HOW TO INVEST
SHAREHOLDER SERVICES . . . . . . . . . . . . . . . . 10
CONDITIONS OF YOUR PURCHASE. . . . . . . . . . . . . 11
COMPLETING THE NEW ACCOUNT FORM. . . . . . . . . . . 13
OPENING A NEW ACCOUNT. . . . . . . . . . . . . . . . 13
PURCHASING ADDITIONAL SHARES . . . . . . . . . . . . 14
EXCHANGING AND REDEEMING SHARES. . . . . . . . . . . 15
Investment Summary
The Fund seeks long-term growth of capital through investments primarily in
the common stocks of well-established companies with the potential for
above-average growth in earnings. Current income is a secondary objective.
This Fund may be appropriate for equity investors who can accept the risks and
potential rewards of a Fund seeking capital appreciation through investing in
"Blue Chip" (i.e., high quality) growth companies. The Fund's dividends will
be distributed annually.
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T. Rowe Price
100% No Load. This Fund has no sales charges, no redemption fees, and no
12b-1 fees. 100% of your investment is credited to your account.
Services. T. Rowe Price provides easy access to your money through bank wires
or telephone redemptions and offers easy exchange to other T. Rowe Price
Funds.
T. Rowe Price Associates, Inc. (T. Rowe Price) was founded in 1937 by the late
Thomas Rowe Price, Jr. As of December 31, 1992, the firm and its affiliates
managed over $40 billion for approximately two and a half million individual
and institutional investors.
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This prospectus contains information you should know about the Fund before you
invest. Please keep it for future reference. A Statement of Additional
Information for the Fund (dated February 25, 1994) has been filed with the
Securities and Exchange Commission and is incorporated by reference in this
prospectus. It is available at no charge by calling: 1-800-638-5660.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION, OR ANY STATE SECURITIES COMMISSION, PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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INVESTMENT
OBJECTIVES
AND PROGRAM
The Fund's investment objective is to provide long-term growth of capital.
While current income is a secondary objective, most of the stocks in the
Fund's portfolio are expected to pay dividends.
The Fund will invest primarily (at least 65% of its total assets) in the
common stocks of Blue Chip companies as determined by T. Rowe Price. These
companies will have the potential for above-average growth in earnings and be
well-established in their respective industries. The Fund will generally
invest in large and medium sized companies which possess some or all of the
following characteristics:
o Leading Market Positions
Blue Chip companies often occupy leading market positions that are
expected to be maintained or enhanced over time. Strong market
positions, particularly in growing industries, can give a company
pricing flexibility as well as the potential for strong unit sales.
These factors can in turn lead to higher earnings growth and greater
share price appreciation.
o Seasoned Management Teams
The depth and breadth of management's operating experience will be
evaluated by T. Rowe Price. The Fund will seek to invest in companies
possessing seasoned management teams with a track record of providing
superior financial results.
o Strong Financial Fundamentals
Companies considered for the Fund's portfolio will typically
demonstrate:
- faster earnings growth than its competitors and the market in general;
- high profit margins relative to competitors;
- strong cash flow;
- healthy balance sheet, with relatively low debt; and
- a high return on equity with a relatively low dividend payout ratio.
In selecting investments for the Fund, T. Rowe Price will conduct
proprietary research to evaluate the growth prospects of the company and the
industry in which it operates. This approach seeks to identify Blue Chip
companies with market franchises in industries believed to be strategically
poised for long-term growth. The investment approach is based on T. Rowe
Price's belief that the combination of solid company fundamentals (with
emphasis on the potential for above-average growth in earnings) along with a
strong outlook for overall industry growth will ultimately reward investors
with a higher stock price.
While primary emphasis is placed on a company's prospects for future
growth, the Fund will not purchase securities which, in T. Rowe Price's
opinion, are overvalued given the underlying business fundamentals. The Fund
seeks to invest in the stocks of growth companies which are attractively
priced relative to their anticipated long-term value, thereby providing the
potential for substantial capital appreciation.
The Fund will diversify among industry sectors by investing no more than
25% of its assets in one industry sector. The Fund will normally be fully
invested with cash reserves typically less than 10%. Up to 25% of the Fund's
assets may be invested in convertible securities, preferred stocks, and fixed
income securities (corporate or government) when deemed consistent with the
Fund's objectives. Generally, the Fund will purchase debt securities
considered investment grade but may invest up to 5% of its total assets in
non-investment grade debt securities, including securities which are not rated
or have received the lowest rating from an established rating agency. Medium
grade bonds are included in the investment grade category. Such bonds are
more susceptible to adverse economic conditions or changing circumstances than
higher grade bonds.
Convertible securities will be purchased to participate in the equity
performance characteristics they can provide. The Fund will generally
purchase convertible securities in companies which meet the criteria for Blue
Chip companies described above.
The Fund's share price will fluctuate with changing market conditions,
and your investment may be worth more or less when redeemed than when
purchased. The Fund should not be relied upon as a complete investment
program, nor used to play short-term swings in the stock market. The Fund
cannot guarantee it will achieve its investment objectives.
Please see Investment Policies for a more complete description of the
Fund's investments and pages 14 - 15 for information on how to purchase,
exchange and redeem Fund shares.
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SUMMARY OF
FUND FEES
AND EXPENSES
The Fund is 100% no-load . . . you pay no fees to purchase, exchange or
redeem shares, nor any ongoing marketing (12b-1) expenses. Lower expenses
benefit you by increasing your investment return from the Fund.
Shown below are estimates of all expenses and fees that the Fund is
expected to incur. These expenses are expressed as a percent of average Fund
net assets. In the interest of limiting the expenses of the Fund during its
initial period of operations, T. Rowe Price has agreed to bear any expenses
through December 31, 1994 which would cause the Fund's ratio of expenses to
average net assets to exceed 1.25%. Expenses paid or assumed under this
agreement are subject to reimbursement to T. Rowe Price by the Fund whenever
the Fund's expense ratio is below 1.25%; however, no reimbursement will be
made after December 31, 1996, or if it would result in the expense ratio
exceeding 1.25%. Without this expense limitation, it is estimated the Fund's
management fee and total expense ratio for the first period of operation would
be 0.65% and 1.59%, respectively. Organizational expenses will be charged to
the Fund over a period not to exceed 60 months. More information about these
expenses may be found below and under Expenses and Management Fee and in the
Statement of Additional Information under Management Fee and Limitation on
Fund Expenses.
Shareholder Transaction Expenses Annual Fund Expenses
Sales load "charge" on Management fee (after
purchases None reduction) 0.31%
Sales load "charge" on Total other (Shareholder
reinvested dividends None servicing, custodial,
auditing, etc.)! 0.94%
Redemption fees None Distribution fees (12b-1) None
Exchange fees None _____
Total Fund Expenses 1.25%
! The Fund charges a $5.00 fee for wire redemptions under $5,000, subject
to change without notice.
EXAMPLE OF
FUND EXPENSES.
The following example illustrates the expenses you would incur on a
$1,000 investment, assuming a 5% annual rate of return and redemption at the
end of each period shown. For example, expenses for the first year in the
Fund would be $13. This is an illustration only. Actual expenses and
performance may be more or less than shown.
1 Year-$13 3 Years-$40
Management Fee. Subject to the expense limitation described on the previous
page, the Fund pays T. Rowe Price an investment management fee consisting of a
flat Individual Fund Fee of 0.30% of the Fund's net assets and a Group Fee,
defined on page 9 under Expenses and Management Fee, of 0.35% as of March 31,
1993. Thus, the total combined management fee for the Fund is estimated to be
0.65% of net assets.
Transfer Agent, Shareholder Servicing, and Administrative Costs. The Fund is
expected to pay fees to: (i) T. Rowe Price Services, Inc. (TRP Services) for
transfer and dividend disbursing agent functions and shareholder services for
all accounts; (ii) T. Rowe Price Retirement Plan Services, Inc. for
subaccounting and recordkeeping services for certain retirement accounts; and
(iii) T. Rowe Price for calculating the daily share price and maintaining the
portfolio and general accounting records of the Fund. These fees are expected
to total approximately $50,000, $10,000, and $15,000, respectively, for the
period ending December 31, 1993.
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FINANCIAL
HIGHLIGHTS
The following table provides information about the Fund's financial history.
It is based on a single share outstanding for the period June 30, 1993
(commencement of operations) to December 31, 1993. The table is part of the
Fund's financial statements which are included in the Fund's annual report and
incorporated by reference into the Statement of Additional Information, which
is available to shareholders. The financial statements in the annual report
have been audited by Price Waterhouse, independent accountants, whose
unqualified report covers the period shown.
<TABLE>
- ---------------------------------------------------------------------------------------------------------
<CAPTION>
Investment Activities Distributions
- ---------------------------------------------------------------------------------------------------------
Net Realized
and
Net Asset Unrealized Total
Value, Net Gain from Net Net Total
Period Ended, Beginning Investment (Loss) on Investment Investment Realized Distri-
December 31 of Period Income Investments Activities Income Gain butions
- ---------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C> <C>
1993 $10.00 $.05 $1.38 $1.43 $(.05) $(.14) $(.19)
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
<CAPTION>
Ratio of
Net
Ratio of Investment
Net Asset Expenses Income to Portfolio
Value, End Total Net Asset to Average Average Turnover
of Period Return (in thousands) Net Assets Net Assets Rate
- ---------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
$11.24 14.3% $24,651 $1.25%!* 0.80%! 89.0%
- ---------------------------------------------------------------------------------------------------------
<FN>
! Annualized
* Excludes expenses in excess of a 1.25% voluntary expense limitation in effect through December 31,
1994.
</TABLE>
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INVESTMENT
POLICIES
AND RISK
CONSIDERATIONS
The Fund's investment program and policies are subject to further restrictions
and risks which are described in the Statement of Additional Information. The
Fund will not make a material change in its investment objectives or a change
in its fundamental policies without obtaining shareholder approval. The
Fund's investment program, unless otherwise specified, is not a fundamental
policy and may be changed without shareholder approval. Shareholders will be
notified of any material change in the investment program. In addition to the
investments described under Investment Program, the Fund's investments may
include, but are not limited to, those described below.
Cash Reserves. While the Fund will generally be fully invested with cash
reserves typically less than 10% of total assets, it may, for temporary,
defensive purposes, invest in reserves without limitation. The Fund may also
establish and maintain reserves as T. Rowe Price believes is advisable to
facilitate the Fund's cash flow needs (e.g., redemptions, expenses, and
purchases of portfolio securities). The Fund's reserves will be invested in
domestic and foreign money market instruments rated within the top two credit
categories by a national rating organization or, if unrated, the T. Rowe Price
equivalent.
Convertible Securities, Preferred Stocks, and Warrants. The Fund may invest
in debt or preferred equity securities convertible into or exchangeable for
equity securities. Preferred stocks are securities that represent an ownership
interest in a corporation providing the owner with claims on the company's
earnings and assets before common stock owners, but after bond owners.
Warrants are options to buy a stated number of shares of common stock at a
specified price any time during the life of the warrants (generally, two or
more years).
Foreign Securities. The Fund may invest up to 10% of its total assets in
securities principally traded in markets outside the United States. While
investments in foreign securities are intended to reduce risk by providing
further diversification, such investments involve sovereign risk in addition
to credit and market risks. Sovereign risk includes local political or
economic developments, potential nationalization, withholding taxes on
dividend or interest payments, and currency blockage (which would prevent cash
from being brought back to the United States). Foreign investments may be
affected favorably or unfavorably by changes in currency rates and exchange
control regulations. Foreign companies may have less public or less reliable
information available about them and may be subject to less governmental
regulation than U.S. companies. Securities of foreign companies may be less
liquid or more volatile than securities of U.S. companies.
Foreign Currency Transactions. Foreign securities of the Fund are subject to
currency risk, that is, the risk that the U.S. dollar value of these
securities may be affected favorably or unfavorably by changes in foreign
currency exchange rates and exchange control regulations. To manage this risk
and facilitate the purchase and sale of foreign securities, the Fund will
engage in foreign currency transactions involving the purchase and sale of
forward foreign currency exchange contracts. Although foreign currency
transactions will be used primarily to protect the Fund from adverse currency
movements, they also involve the risk that anticipated currency movements will
not be accurately predicted and the Fund's total return could be adversely
affected as a result.
Futures and Options. The Fund may enter into futures contracts (or options
thereon) to hedge all or a portion of its portfolio, as a hedge against
changes in prevailing levels of currency exchange rates, or as an efficient
means of adjusting its exposure to the stock and currency markets. The Fund
will not use futures contracts for speculation. The Fund will limit its use
of futures contracts so that no more than 5% of the Fund's total assets would
be committed to initial margin deposits or premiums on such contracts. The
Fund may also write covered call and put options and purchase put and call
options on securities, financial indices, and currencies. The aggregate
market value of the Fund's portfolio securities or currencies covering call or
put options will not exceed 25% of the Fund's net assets. Futures contracts
and options can be highly volatile and could result in reduction of the Fund's
total return, and the Fund's attempt to use such investments for hedging
purposes may not be successful. Successful futures strategies require the
ability to predict future movements in securities prices, interest rates and
other economic factors. The Fund's potential losses from the use of futures
extends beyond its initial investment in such contracts. Also, losses from
options and futures could be significant if the Fund is unable to close out
its position due to disruptions in the market or lack of liquidity.
Illiquid Securities. The Fund may acquire illiquid securities and securities
of unseasoned issuers (limited in total to not more than 15% of net assets).
Because an active trading market does not exist for all such securities, their
sale may be subject to delay and additional costs. The Fund will not invest
more than 5% of its total assets in restricted securities and not more than 5%
in securities of unseasoned issuers. Securities eligible for resale under
Rule 144A of the Securities Act of 1933 are not included in the 5% limitation
but are subject to the 15% limitation.
Lending of Portfolio Securities. As a fundamental policy, for the purpose of
realizing additional income, the Fund may lend securities with a value of up
to 30% of its total assets to broker-dealers, institutional investors, or
other persons. Any such loan will be continuously secured by collateral at
least equal to the value of the security loaned. Such lending could result in
delays in receiving additional collateral or in the recovery of the securities
or possible loss of rights in the collateral should the borrower fail
financially.
Repurchase Agreements. The Fund may enter into repurchase agreements with a
well-established securities dealer or a bank which is a member of the Federal
Reserve System. In the event of a bankruptcy or default of certain sellers of
repurchase agreements, the Fund could experience costs and delays in
liquidating the underlying security, which is held as collateral, and the Fund
might incur a loss if the value of the collateral held declines during this
period.
Portfolio Turnover. The Fund will not generally trade in securities for
short-term profits but, when circumstances warrant, securities may be
purchased and sold without regard to the length of time held. The Fund cannot
accurately predict its annual portfolio turnover rate; however, the rate is
generally expected to be below that of the average growth stock mutual fund,
and is not expected to exceed 100% for the first year.
Fundamental Investment Policies. As a matter of fundamental policy, the Fund
will not, among other things: (1) purchase a security of any issuer if, as a
result, it would (a) cause the Fund to have more than 25% of its total assets
concentrated in any one industry, or (b) with respect to 75% of its assets,
cause the Fund's holdings of that issuer to amount to more than 5% of the
Fund's total assets or cause the Fund to own more than 10% of the outstanding
voting securities of any issuer; (2) borrow money except for temporary
non-leveraging purposes from banks (a) in amounts not exceeding 30% of its
total assets to facilitate redemption requests, or (b) in amounts not
exceeding 5% of its total assets for emergency, administrative or other proper
purposes.
Other Investment Policies. As a matter of operating policy, the Fund will
not, among other things: (1) purchase a security of any issuer if, as a
result, more than 5% of the value of the Fund's total assets would be invested
in the securities of unseasoned issuers which at the time of purchase have
been in operation for less than three years, including predecessors and
unconditional guarantors; (2) in any manner transfer as collateral for
indebtedness any securities owned by the Fund except in connection with
permissible borrowings or investments but no such transfer will exceed 30% of
the Fund's total assets; and (3) purchase additional securities when money
borrowed exceeds 5% of the Fund's total assets.
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PERFORMANCE
INFORMATION
The Fund may advertise total return figures on both a cumulative and compound
average annual basis and compare them to various indices (e.g., the S&P 500),
other mutual funds or other performance measures. (The total return of the
Fund consists of the change in its net asset value per share and the net
income it earns.) Cumulative total return compares the amount invested at the
beginning of a period with the amount redeemed at the end of the period,
assuming the reinvestment of all dividends and capital gain distributions.
The compound average annual total return indicates a yearly compound average
of the Fund's performance, derived from the cumulative total return. The
annual compound rate of return for the Fund may vary from any average.
Further information about the Fund's performance is contained in its annual
report which is available free of charge.
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CAPITAL STOCK
The Fund is a Maryland corporation organized in 1993 and registered with the
Securities and Exchange Commission under the Investment Company Act of 1940 as
a diversified, open-end investment company, commonly known as a "mutual fund."
A mutual fund, such as the Fund, enables shareholders to: (1) obtain
professional management of investments, including T. Rowe Price's proprietary
research; (2) diversify their portfolio to a greater degree than would be
generally possible if they were investing as individuals and thereby reduce,
but not eliminate risks; and (3) simplify the recordkeeping and reduce
transaction costs associated with investments.
The Fund has an Investment Advisory Committee composed of the following
members: Thomas H. Broadus, Jr., Chairman, Brian W. H. Berghuis, John D.
Gillespie, Larry J. Puglia, Brian C. Rogers, Robert W. Smith, and William J.
Stromberg. The Committee Chairman has day-to-day responsibility for managing
the Fund and works with the Committee in developing and executing the Fund's
investment program. Mr. Broadus has been Chairman of the Committee since its
inception in 1993. He has been managing investments since joining T. Rowe
Price in 1966.
Shareholder Rights. The Fund issues one class of capital stock, all shares of
which have equal rights with regard to voting, redemptions, dividends,
distributions, and liquidations. Fractional shares have voting rights and
participate in any distributions and dividends. Shareholders have no
preemptive or conversion rights; nor do they have cumulative voting rights.
When the Fund's shares are issued, they are fully paid and nonassessable. The
Fund does not routinely hold annual meetings of shareholders. However, if
shareholders representing at least 10% of all votes of the Fund entitled to be
cast so desire, they may call a special meeting of shareholders of the Fund
for the purpose of voting on the question of the removal of any director(s).
The total authorized capital stock of the Fund consists of 1,000,000,000
shares, each having a par value of $.0001. As of the date of this prospectus,
T. Rowe Price owned 10,000 shares of the Fund which represented all of the
Fund's outstanding shares. As of March 31, 1993, there were 2,629,547
shareholders in the other 49 T. Rowe Price Funds.
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FUND OPERATIONS
AND SERVICES
The following sections apply to this Fund and all T. Rowe Price Equity Funds.
NAV,
PRICING, AND
EFFECTIVE
DATE
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Net Asset Value Per Share (NAV). The NAV per share, or share price, for the
Fund is normally determined as of 4:00 pm Eastern Time (ET) each day the New
York Stock Exchange is open. The Fund's share price is calculated by
subtracting its liabilities from its total assets and dividing the result by
the total number of shares outstanding. Among other things, the Fund's
liabilities include accrued expenses and dividends payable, and its total
assets include portfolio securities valued at market as well as income accrued
but not yet received.
IF YOUR ORDER IS RECEIVED
IN GOOD ORDER BEFORE 4:00
PM ET, YOU WILL RECEIVE
THAT DAY'S NAV.
Purchased shares are priced at that day's NAV if your request is
received before 4:00 pm ET in good order. (See Completing the New Account
Form and Opening a New Account.) If received later than 4:00 pm ET, shares
will be priced at the next business day's NAV.
Redemptions are priced at that day's NAV if your request is received
before 4:00 pm ET in good order at the transfer agent's offices at T. Rowe
Price Account Services, P.O. Box 89000, Baltimore, MD 21289-0220. If received
after 4:00 pm ET, shares will be priced at the next business day's NAV.
Also, we cannot accept requests which specify a particular date for
purchase or redemption or which specify any special conditions. If your
redemption request cannot be accepted, you will be notified and given further
instructions.
Exchanges are normally priced in the same manner as purchases and
redemptions. However, if you are exchanging into a bond or money fund and the
release of your exchange proceeds is delayed for the allowable five business
days (see Receiving Your Proceeds), you will not begin to earn dividends until
the sixth business day after the exchange.
The Fund reserves the right to change the time at which purchases,
redemptions, and exchanges are priced if the New York Stock Exchange closes at
a time other than 4:00 pm ET or an emergency exists.
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RECEIVING
YOUR
PROCEEDS
Redemption proceeds are mailed to the address or sent by wire or ACH transfer
to the bank account designated on your New Account Form. They are generally
sent the next business day after your redemption request is received in good
order. Proceeds sent by bank wire will be credited to your bank account the
next business day and proceeds sent by ACH transfer will be credited the
second day after the sale. In addition, under unusual conditions, or when
deemed to be in the best interests of the Fund, redemption proceeds may not be
sent for up to five business days after your request is received to allow for
the orderly liquidation of securities. Requests by mail for wire redemptions
(unless previously authorized) must have a signature guarantee.
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DIVIDENDS AND
DISTRIBUTIONS
The Fund distributes all net investment income and capital gains to
shareholders. Dividends from net investment income and distributions from
capital gains, if any, are normally declared in December and paid in January.
However, dividends from net investment income for the Balanced, Growth &
Income, Equity Income, and Dividend Growth Funds will be declared and paid
quarterly. Dividends and distributions declared by the Fund will be reinvested
unless you choose an alternative payment option on the New Account Form.
Dividends not reinvested are paid by check or transmitted to your bank account
via ACH. If the U.S. Postal Service cannot deliver your check, or if your
check remains uncashed for six months, the Fund reserves the right to reinvest
your distribution check in your account at the then current NAV and to
reinvest all subsequent distributions in shares of the Fund.
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TAXES
FORM 1099-DIV
WILL BE MAILED
TO YOU IN JANUARY.
Dividends and Distributions. In January, the Fund will mail you Form 1099-DIV
indicating the federal tax status of your dividends and capital gain
distributions. Generally, dividends and distributions are taxable in the year
they are paid. However, any dividends and distributions paid in January but
declared during the prior three months are taxable in the year they are
declared. Dividends and distributions are taxable to you regardless of whether
they are taken in cash or reinvested. Dividends and short-term capital gain
distributions are taxable as ordinary income; long-term capital gain
distributions are taxable as long-term capital gains. The capital gain
holding period is determined by the length of time the Fund has held the
securities, not the length of time you have owned Fund shares.
Shares Sold. A redemption or exchange of Fund shares is treated as a sale for
tax purposes which will result in a short or long-term capital gain or loss,
depending on how long you have owned the shares. In January, the Fund will
mail you Form 1099-B indicating the trade date and proceeds from all sales and
exchanges.
Undistributed Income and Gains. At the time of purchase, the share price of
the Fund may reflect undistributed income, capital gains or unrealized
appreciation of securities. Any income or capital gains from these amounts
which are later distributed to you are fully taxable.
Foreign Transactions (All Funds other than New America Growth Fund).
Distributions resulting from the sale of certain foreign currencies and debt
securities, to the extent of foreign exchange gains, are taxed as ordinary
income or loss. If the Fund pays nonrefundable taxes to foreign governments
during the year, the taxes will reduce the Fund's dividends.
Corporations. All or part of the Fund's dividends will be eligible for the
70% deduction for dividends received by corporations.
Tax-Qualified Retirement Plans. Tax-qualified retirement plans generally will
not be subject to federal tax liability on either distributions from the Fund
or redemption of shares of the Fund. Rather, participants in such plans will
be taxed when they begin taking distributions from the plans.
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MANAGEMENT
OF THE FUND
Investment Manager. T. Rowe Price is responsible for selection and management
of the Fund's portfolio investments. T. Rowe Price serves as investment
manager to a variety of individual and institutional investors, including
limited and real estate partnerships and other mutual funds.
Board of Directors/Trustees. The management of the Fund's business and
affairs is the responsibility of the Fund's Board of Directors/Trustees.
Portfolio Transactions. Decisions with respect to the purchase and sale of
the Fund's portfolio securities are made by T. Rowe Price. The Fund's Board
of Directors/Trustees has authorized T. Rowe Price to utilize certain brokers
indirectly related to T. Rowe Price in the capacity of broker in connection
with the execution of the Fund's portfolio transactions.
Investment Services. T. Rowe Price Investment Services, Inc., a wholly-owned
subsidiary of T. Rowe Price, is the distributor for this Fund as well as all
other T. Rowe Price Funds.
Transfer and Dividend Disbursing Agent, Shareholder Servicing and
Administrative. TRP Services, a wholly-owned subsidiary of T. Rowe Price,
serves the Fund as transfer and dividend disbursing agent. T. Rowe Price
Retirement Plan Services, Inc., a wholly-owned subsidiary of T. Rowe Price,
performs subaccounting and recordkeeping services for shareholder accounts in
certain retirement plans investing in the Price Funds. T. Rowe Price
calculates the daily share price and maintains the portfolio and general
accounting records of the Fund. The address for TRP Services and T. Rowe
Price Retirement Plan Services, Inc. is 100 East Pratt Street, Baltimore,
Maryland 21202.
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EXPENSES AND
MANAGEMENT
FEE
The Fund bears all expenses of its operations other than those incurred by T.
Rowe Price under its Investment Management Agreement with T. Rowe Price. Fund
expenses include: the management fee; shareholder servicing fees and expenses;
custodian and accounting fees and expenses; legal and auditing fees; expenses
of preparing and printing prospectuses and shareholder reports; registration
fees and expenses; proxy and annual meeting expenses, if any; and
directors'/trustees' fees and expenses.
Management Fee. The Fund pays T. Rowe Price an investment management fee
consisting of an Individual Fund Fee and a Group Fee. See Summary of Fund
Fees and Expenses for the Individual Fund Fee. The Group Fee varies and is
based on the combined net assets of all mutual funds sponsored and managed by
T. Rowe Price and Rowe Price-Fleming International, Inc., excluding T. Rowe
Price Spectrum Fund, Inc., and any institutional or private label mutual
funds, and distributed by T. Rowe Price Investment Services, Inc.
The Fund pays, as its portion of the Group Fee, an amount equal to the
ratio of its daily net assets to the daily net assets of all the Price Funds.
The table below shows the annual Group Fee rate at various asset levels of the
combined Price Funds:
0.480% First $1 billion 0.350% Next $2 billion
0.450% Next $1 billion 0.340% Next $5 billion
0.420% Next $1 billion 0.330% Next $10 billion
0.390% Next $1 billion 0.320% Next $10 billion
0.370% Next $1 billion 0.310% Thereafter
0.360% Next $2 billion
Based on combined Price Funds' assets of approximately $27.7 billion at March
31, 1993, the Group Fee was 0.35%.
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SHAREHOLDER
SERVICES
The following is a brief summary of services available to shareholders in the
T. Rowe Price Funds, some of which may be restricted or unavailable to
retirement plan accounts. You must authorize most of these services on a New
Account or Shareholder Services Form. Services may be modified or withdrawn at
any time without notice. Please verify all transactions on your confirmation
statements promptly after receiving them. Any discrepancies must be reported
to Shareholder Services immediately.
Automatic Asset Builder. You can have us move $50 or more on the same day
each month from your bank account or invest $50 or more from your paycheck
into any T. Rowe Price Fund.
INVESTOR SERVICES
1-800-638-5660
1-410-547-2308
Discount Brokerage Service. You can trade stocks, bonds, options, CDs,
Treasury Bills, and precious metals at substantial savings through our
Discount Brokerage Service. Call Investor Services for more information.
Exchange Service. You can move money from one account to an existing
identically registered account or open a new identically registered account.
Remember that, for tax purposes, an exchange is treated as a redemption and a
new purchase. Exchanges into a state tax-free fund are limited to investors
residing in states where those funds are qualified for sale. Some of the T.
Rowe Price Funds may impose a redemption fee of 1-2%, payable to such Funds,
on shares held for less than 12 months.
Retirement Plans. For details on IRAs, please call Investor Services. For
details on all other retirement plans, please call our Trust Company at
1-800-492-7670.
SHAREHOLDER SERVICES
1-800-225-5132
1-410-625-6500
Telephone Services. The following services are explained fully in the
Services Guide, which is mailed to new T. Rowe Price investors. If you don't
have a copy, please call Shareholder Services. (All telephone calls to
Shareholder Services and Investor Services are recorded in order to protect
you, the Fund, and its agents.)
24-Hour Service. Tele*Access(registered trademark) provides information
on yields, prices, latest dividends, account balances, and last
transaction as well as the ability to initiate purchase, redemption and
exchange orders (if you have established Telephone Services). Just call
1-800-638-2587 and press the appropriate codes into your touch-tone
phone. PC*Access(registered trademark) provides the same information as
Tele*Access, but on a personal computer.
Electronic Transfers. We offer three free methods for purchasing or
redeeming Fund shares in amounts of $100 to $100,000 through ACH
transfers between your bank checking and fund accounts:
- By calling Shareholder Services during business hours
(Tele-Connect(registered trademark));
- By touch-tone phone any day, any time (Tele*Access);
- By personal computer any day, any time (PC*Access).
If your bank checking and Fund account are not identically registered,
you will need a signature guarantee to establish this service.
Wire Transfers. Wire transfers can be processed through bank wires (a
$5 charge applies to redemption amounts under $5,000, and your bank may
charge you for receiving wires). While this is usually the quickest
transfer method, the Fund reserves the right to temporarily suspend
wires under unusual circumstances.
- -----------------------------------------------------------------------------
CONDITIONS
OF YOUR
PURCHASE
Account Balance (All Funds other than New Era Fund). If your account drops
below $1,000 for three months or more, the Fund has the right to close your
account, after giving 60 days' notice, unless you make additional investments
to bring your account value to $1,000 or more.
Broker-Dealers. Purchases or redemptions through broker-dealers, banks, and
other institutions may be subject to service fees imposed by those entities.
No such fees are charged by T. Rowe Price Investment Services or the Fund if
shares are purchased or redeemed directly from the Fund.
Excessive Trading and Exchange Limitations. To protect Fund shareholders
against disruptions in portfolio management which might occur as a result of
too frequent buy and sell activity and to minimize Fund expenses associated
with such transaction activity, the Fund prohibits excessive trading in any
account (or group of accounts managed by the same person). Within any 120
consecutive-day period, investors may not exchange between Price Funds more
than twice or buy and sell the Price Funds more than once, if the transactions
involve substantial assets or a substantial portion of the assets in the
account or accounts. This policy is applied on a multi-fund basis. Any
transactions above and beyond these guidelines will be considered to be
excessive trading, and the investor may be prohibited from making additional
purchases or exercising the exchange privilege.
This policy does not apply to exchanges solely between, or purchases and sales
solely of, the Price Money Funds, nor does it apply to simple redemptions from
any Fund.
Nonpayment. If your check, wire or ACH transfer does not clear, or if payment
is not received for any telephone purchase, the transaction will be cancelled
and you will be responsible for any loss the Fund or Investment Services
incurs. If you are already a shareholder, the Fund can redeem shares from any
identically registered account in this Fund or any other T. Rowe Price Fund as
reimbursement for any loss incurred. You may be prohibited or restricted from
making future purchases in any of the T. Rowe Price Funds.
U.S. Dollars. All purchases must be paid for in U.S. dollars, and checks must
be drawn on U.S. banks.
Redemptions in Excess of $250,000. Redemption proceeds are normally paid in
cash. However, if you redeem more than $250,000, or 1% of the Fund's net
assets, in any 90-day period, the Fund may in its discretion: (1) pay the
difference between the redemption amount and the lesser of these two
figures with securities of the Fund or (2) delay the transmission of your
proceeds for up to five business days after your request is received.
Signature Guarantees. A signature guarantee is designed to protect you and
the Fund by verifying your signature. You will need one to:
(1) Establish certain services after the account is opened.
(2) Redeem over $50,000 by written request (unless you have authorized
Telephone Services).
(3) Redeem shares when proceeds are: (i) being mailed to an address
other than the address of record, (ii) made payable to other than
the registered owner(s), or (iii) being sent to a bank account
other than the bank account listed on your fund account.
(4) Transfer shares to another owner or to a different registration.
(5) Send us written instructions asking us to wire redemption proceeds
(unless previously authorized).
(6) Establish Electronic Transfers when your bank checking and fund
account are not identically registered.
These requirements may be waived or modified in certain instances.
Acceptable guarantors are all eligible guarantor institutions as defined
by the Securities Exchange Act of 1934 such as: commercial banks which are
FDIC members, trust companies, firms which are members of a domestic stock
exchange, and foreign branches of any of the above. We cannot accept
guarantees from institutions or individuals who do not provide reimbursement
in the case of fraud, such as notaries public.
Telephone Exchange and Redemption. Telephone exchange and redemption are
established automatically when you sign the New Account Form unless you check
the box which states that you do not want these services. The Fund uses
reasonable procedures (including shareholder verification) to confirm that
instructions given by telephone are genuine. If these procedures are not
followed, it is the opinion of the staff of certain regulatory agencies that
the Fund may be liable for any losses that may result from acting on the
instructions given. All conversations are recorded, and a confirmation is
sent within five business days after the telephone transaction.
Ten-Day Hold. The mailing of proceeds for redemption requests involving any
shares purchased by personal, corporate or government check, or ACH transfer
is generally subject to a 10-day delay to allow the check or transfer to
clear. The 10-day clearing period does not affect the trade date on which
your purchase or redemption order is priced, or any dividends and capital gain
distributions to which you may be entitled through the date of redemption. If
your redemption request was sent by mail or mailgram, proceeds will be mailed
no later than the seventh calendar day following receipt unless the check or
ACH transfer has not cleared. The 10-day hold does not apply to purchases
made by wire, Automatic Asset Builder-Paycheck, or cashier's, treasurer's, or
certified checks.
The Fund and its agents reserve the right to: (1) reject any purchase or
exchange, cancel any purchase due to nonpayment, or reject any exchange or
redemption where the Fund has not received payment; (2) waive or lower the
investment minimums; (3) accept initial purchases by telephone or mailgram;
(4) waive the limit on subsequent purchases by telephone; (5) reject any
purchase or exchange prior to receipt of the confirmation statement; (6)
redeem your account (see Tax Identification Number); (7) modify the conditions
of purchase at any time; and (8) reject any check not made directly payable to
the Fund or T. Rowe Price (call Shareholder Services for more information).
- -----------------------------------------------------------------------------
COMPLETING THE
NEW ACCOUNT
FORM
Tax Identification Number. We must have your correct social security or
corporate tax identification number and a signed New Account Form or W-9 Form.
Otherwise, federal law requires the Fund to withhold 31% (or such other amount
required by applicable IRS regulations) of your dividends, capital gain
distributions, and redemptions, and may subject you to a fine. You also will
be prohibited from opening another account by exchange. If this information
is not received within 60 days after your account is established, your account
may be redeemed, priced at the NAV on the date of redemption.
YOU MUST PROVIDE YOUR
TAX ID NUMBER AND SIGN
THE NEW ACCOUNT FORM.
Unless you otherwise request, one shareholder report will be mailed to
multiple account owners with the same tax identification number and same zip
code and to those shareholders who have requested that their accounts be
combined with someone else's for financial reporting.
Account Registration. If you own other T. Rowe Price Funds, make certain the
registration (name and account type) is identical to your other funds for easy
exchange. Remember to sign the form exactly as the name appears in the
registration section.
Services. By signing up for services on the New Account Form, rather than
after the account is opened, you will avoid having to complete a separate form
and obtain a signature guarantee (see Conditions of Your Purchase).
- -----------------------------------------------------------------------------
OPENING A NEW
ACCOUNT
Minimum initial investment: $2,500 ($1,000 for retirement plans and UGMA/UTMA
and IRA accounts; $50 per month for Automatic Asset Builder accounts-see
Shareholder Services)
By Mail Send your New Account Form and check to:
CHECKS PAYABLE TO
T. ROWE PRICE FUNDS.
Regular Mail Mailgram, Express, Registered,
or Certified Mail
T. Rowe Price Account Services T. Rowe Price Account Services
P. O. Box 17300 10090 Red Run Boulevard
Baltimore, MD 21298-9353 Owings Mills, MD 21117
- -----------------------------------------------------------------------------
INVESTOR SERVICES
1-800-638-5660
1-410-547-2308
By Wire Call Investor Services for an account number and use Wire
Address below. Then, complete the New Account Form and mail it
to one of the addresses above. (Not applicable to retirement
plans.)
Wire Address Morgan Guaranty Trust Company
of New York
(to give your bank): ABA #021000238
T. Rowe Price (fund name)
/AC-00153938
Account name(s) and account
number
- -----------------------------------------------------------------------------
SHAREHOLDER SERVICES
1-800-225-5132
1-410-625-6500
By Exchange Call Shareholder Services. The new account will have the same
registration as the account from which you are exchanging.
Services for the new account may be carried over by telephone
request if preauthorized on the existing account. See
Excessive Trading and Exchange Limitations under Conditions of
Your Purchase.
- -----------------------------------------------------------------------------
In Person Drop off your New Account Form and obtain a receipt at a T.
Rowe Price Investor Center:
101 East Lombard Street T. Rowe Price Financial Center
First Floor First Floor
Baltimore, MD 10090 Red Run Boulevard
Owings Mills, MD
Farragut Square ARCO Tower
First Floor 31st Floor
900 17th Street, NW 515 South Flower Street
Washington, DC Los Angeles, CA
- -----------------------------------------------------------------------------
PURCHASING
ADDITIONAL
SHARES
Minimum: $100 ($50 for retirement plans)
By Wire Call Shareholder Services or use the Wire Address (see Opening
a New Account).
- -----------------------------------------------------------------------------
By Mail Indicate your account number and the Fund name on your check.
Mail it to us at the address below with the stub from a
statement confirming a prior transaction or a note stating that
you want to purchase shares in that Fund and giving us the
account number.
SHAREHOLDER SERVICES
1-800-225-5132
1-410-625-6500
T. Rowe Price Funds
Account Services
P.O. Box 89000
Baltimore, MD 21289-1500
- -----------------------------------------------------------------------------
By ACH Use Tele*Access, PC*Access or call Shareholder Services (if you
Transfer have established Telephone Services) for ACH transfers.
- -----------------------------------------------------------------------------
By Automatic Fill out the Automatic Asset Builder section on the New Account
Asset Builder or Shareholder Services Form.
- -----------------------------------------------------------------------------
Minimum: $5,000
By Phone Call Shareholder Services.
- -----------------------------------------------------------------------------
EXCHANGING
AND REDEEMING
SHARES
By Phone Call Shareholder Services. If you find our phones busy during
unusually volatile markets, please consider placing your order
by express mail, mailgram, Tele*Access or PC*Access if you have
authorized Telephone Services. For exchange policy, see
Excessive Trading and Exchange Limitations under Conditions of
Your Purchase.
Redemption proceeds can be mailed, sent by electronic transfer,
or wired to your bank. The Fund charges a $5.00 fee for wire
redemptions under $5,000, subject to change without notice.
Your bank may also charge you for receiving wires.
- -----------------------------------------------------------------------------
SHAREHOLDER SERVICES
1-800-225-5132
1-410-625-6500
By Mail Indicate account name(s) and numbers, fund name(s), and
exchange or redemption amount. For exchanges, send your request
to our regular mail address and indicate the accounts you are
exchanging from and to along with the amount. We require the
signature of all owners exactly as registered, and possibly a
signature guarantee (see Signature Guarantees under Conditions
of Your Purchase).
T. ROWE PRICE
TRUST COMPANY
1-800-492-7670
1-410-625-6585
Note: Distributions from retirement accounts, including IRAs,
must be in writing. Please call Shareholder Services to obtain
an IRA Distribution Request Form. For employer-sponsored
retirement accounts, call T. Rowe Price Trust Company or your
plan administrator for instructions. Shareholders holding
previously issued certificates must conduct transactions by
mail. If you lose a stock certificate, you may incur an
expense to replace it. Call Shareholder Services for further
information.
Mailing addresses:
Regular Mail Mailgram, Express, Registered,
or Certified Mail
Non-Retirement
and IRA Accounts All Accounts
________________ ____________
T. Rowe Price Account Services T. Rowe Price Account Services
P.O. Box 89000 10090 Red Run Boulevard
Baltimore, MD 21289-0220 Owings Mills, MD 21117
Employer-Sponsored
Retirement Accounts
___________________
T. Rowe Price Trust Company
P.O. Box 89000
Baltimore, MD 21289-0300
- -----------------------------------------------------------------------------
DESCRIPTION OF SIGNIFICANT DIFFERENCES BETWEEN EDGAR FILING AND PRINTED COPY
Information appearing in all capital letters before a paragraph in the Edgar
filing will appear, in the printed copy, as call-outs in the left margin.
PAGE 2
STATEMENT OF ADDITIONAL INFORMATION
T. Rowe Price Blue Chip Growth Fund, Inc.
(the "Fund")
This Statement of Additional Information is not a prospectus but should
be read in conjunction with the Fund's prospectus dated February 25, 1994,
which may be obtained from T. Rowe Price Investment Services, Inc., 100 East
Pratt Street, Baltimore, Maryland 21202.
The date of this Statement of Additional Information is February 25,
1994.
PAGE 3
TABLE OF CONTENTS
Page Page
Call and Put Options . . . . . . .3 Investment Objectives and Policies . 2
Capital Stock. . . . . . . . . . 39 Investment Performance . . . . . . .35
Custodian. . . . . . . . . . . . 28 Investment Program . . . . . . . . . 3
Dealer Options . . . . . . . . . .7 (pages 2 and 3 in Prospectus)
Distributor for Fund . . . . . . 28 Investment Restrictions. . . . . . .20
Dividends. . . . . . . . . . . . 34 Legal Counsel. . . . . . . . . . . .40
Federal and State Registration Lending of Portfolio Securities. . .14
of Shares. . . . . . . . . . . 40 Management of Fund . . . . . . . . .24
Foreign Currency Transactions. . 15 Net Asset Value Per Share. . . . . .33
Foreign Securities . . . . . . . 15 Portfolio Transactions . . . . . . .29
Futures Contracts. . . . . . . . .8 Pricing of Securities. . . . . . . .33
Illiquid Securities. . . . . . . 19 Principal Holders of Securities. . .25
Independent Accountants. . . . . 40 Repurchase Agreements. . . . . . . .19
Investment Management Services . 26 Taxation of Foreign Shareholders . .35
(pages 9 and 10 in Prospectus) Tax Status . . . . . . . . . . . . .34
Investment Objectives. . . . . . .2 (page 9 in Prospectus)
(pages 2 and 3 in Prospectus)
INVESTMENT OBJECTIVES AND POLICIES
The following information supplements the discussion of the Fund's
investment objectives and policies discussed on pages 2 and 3 and 4 through 6
of the prospectus. Unless otherwise specified, the investment program and
restrictions of the Fund are not fundamental policies. The operating policies
of the Fund are subject to change by its Board of Directors without
shareholder approval. However, shareholders will be notified of a material
change in an operating policy. The fundamental policies of the Fund may not
be changed without the approval of at least a majority of the outstanding
shares of the Fund or, if it is less, 67% of the shares represented at a
meeting of shareholders at which the holders of 50% or more of the shares are
represented.
INVESTMENT OBJECTIVES
The Fund's investment objective is to provide long-term growth of
capital. While current income is a secondary objective, most of the stocks in
the Fund's portfolio are expected to pay dividends.
The Fund's share price will fluctuate with changing market conditions,
and your investment may be worth more or less when redeemed than when
purchased. The Fund should not be relied upon as a complete investment
program, nor used to play short-term swings in the stock market. The Fund
cannot guarantee it will achieve its investment objectives.
INVESTMENT PROGRAM
The Fund will invest primarily (at least 65% of its total assets) in the
common stocks of Blue Chip companies as determined by T. Rowe Price. These
companies will have the potential for above-average growth in earnings and be
well-established in their respective industries. As a result, the Fund will
generally invest in large and medium sized companies.
In addition to the investments described in the Fund's prospectus, the
Fund may invest in the following:
PAGE 4
Writing Covered Call Options
The Fund may write (sell) "covered" call options and purchase options to
close out options previously written by the Fund. In writing covered call
options, the Fund expects to generate additional premium income which should
serve to enhance the Fund's total return and reduce the effect of any price
decline of the security or currency involved in the option. Covered call
options will generally be written on securities or currencies which, in the
opinion of the Fund's investment manager, T. Rowe Price Associates, Inc. ("T.
Rowe Price"), are not expected to make any major price increases or moves in
the near future but which, over the long term, are deemed to be attractive
investments for the Fund.
A call option gives the holder (buyer) the "right to purchase" a
security or currency at a specified price (the exercise price), at expiration
of the option (European style) or at any time until a certain date (the
expiration date) (American style). So long as the obligation of the writer of
a call option continues, he may be assigned an exercise notice by the broker-
dealer through whom such option was sold, requiring him to deliver the
underlying security or currency against payment of the exercise price. This
obligation terminates upon the expiration of the call option, or such earlier
time at which the writer effects a closing purchase transaction by
repurchasing an option identical to that previously sold. To secure his
obligation to deliver the underlying security or currency in the case of a
call option, a writer is required to deposit in escrow the underlying security
or currency or other assets in accordance with the rules of a clearing
corporation. The Fund will write only covered call options. This means that
the Fund will own the security or currency subject to the option or an option
to purchase the same underlying security or currency, having an exercise price
equal to or less than the exercise price of the "covered" option, or will
establish and maintain with its custodian for the term of the option, an
account consisting of cash, U.S. government securities or other liquid high
grade debt obligations having a value equal to the fluctuating market value of
the optioned securities or currencies. In order to comply with the
requirements of several states, the Fund will not write a covered call option
if, as a result, the aggregate market value of all portfolio securities or
currencies covering call or put options exceeds 25% of the market value of the
Fund's net assets. Should these state laws change or should the Fund obtain a
waiver of their application, the Fund reserves the right to increase this
percentage. In calculating the 25% limit, the Fund will offset, against the
value of assets covering written calls and puts, the value of purchased calls
and puts on identical securities or currencies with identical maturity dates.
Portfolio securities or currencies on which call options may be written
will be purchased solely on the basis of investment considerations consistent
with the Fund's investment objectives. The writing of covered call options is
a conservative investment technique believed to involve relatively little risk
(in contrast to the writing of naked or uncovered options, which the Fund will
not do), but capable of enhancing the Fund's total return. When writing a
covered call option, the Fund, in return for the premium, gives up the
opportunity for profit from a price increase in the underlying security or
currency above the exercise price, but conversely retains the risk of loss
should the price of the security or currency decline. Unlike one who owns
securities or currencies not subject to an option, the Fund has no control
over when it may be required to sell the underlying securities or currencies,
since it may be assigned an exercise notice at any time prior to the
expiration of its obligation as a writer. If a call option which the Fund has
written expires, the Fund will realize a gain in the amount of the premium;
however, such gain may be offset by a decline in the market value of the
underlying security or currency during the option period. If the call option
is exercised, the Fund will realize a gain or loss from the sale of the
underlying security or currency. The Fund does not consider a security or
currency covered by a call to be "pledged" as that term is used in the Fund's
policy which limits the pledging or mortgaging of its assets.
The premium received is the market value of an option. The premium the
Fund will receive from writing a call option will reflect, among other things,
the current market price of the underlying security or currency, the
relationship of the exercise price to such market price, the historical price
volatility of the underlying security or currency, and the length of the
option period. Once the decision to write a call option has been made, T.
Rowe Price, in determining whether a particular call option should be written
on a particular security or currency, will consider the reasonableness of the
anticipated premium and the likelihood that a liquid secondary market will
exist for those options. The premium received by the Fund for writing covered
call options will be recorded as a liability of the Fund. This liability will
be
PAGE 5
adjusted daily to the option's current market value, which will be the latest
sale price at the time at which the net asset value per share of the Fund is
computed (close of the New York Stock Exchange), or, in the absence of such
sale, the latest asked price. The option will be terminated upon expiration
of the option, the purchase of an identical option in a closing transaction,
or delivery of the underlying security or currency upon the exercise of the
option.
Closing transactions will be effected in order to realize a profit on an
outstanding call option, to prevent an underlying security or currency from
being called, or, to permit the sale of the underlying security or currency.
Furthermore, effecting a closing transaction will permit the Fund to write
another call option on the underlying security or currency with either a
different exercise price or expiration date or both. If the Fund desires to
sell a particular security or currency from its portfolio on which it has
written a call option, or purchased a put option, it will seek to effect a
closing transaction prior to, or concurrently with, the sale of the security
or currency. There is, of course, no assurance that the Fund will be able to
effect such closing transactions at a favorable price. If the Fund cannot
enter into such a transaction, it may be required to hold a security or
currency that it might otherwise have sold. When the Fund writes a covered
call option, it runs the risk of not being able to participate in the
appreciation of the underlying securities or currencies above the exercise
price, as well as the risk of being required to hold on to securities or
currencies that are depreciating in value. This could result in higher
transaction costs. The Fund will pay transaction costs in connection with the
writing of options to close out previously written options. Such transaction
costs are normally higher than those applicable to purchases and sales of
portfolio securities.
Call options written by the Fund will normally have expiration dates of
less than nine months from the date written. The exercise price of the
options may be below, equal to, or above the current market values of the
underlying securities or currencies at the time the options are written. From
time to time, the Fund may purchase an underlying security or currency for
delivery in accordance with an exercise notice of a call option assigned to
it, rather than delivering such security or currency from its portfolio. In
such cases, additional costs may be incurred.
The Fund will realize a profit or loss from a closing purchase
transaction if the cost of the transaction is less or more than the premium
received from the writing of the option. Because increases in the market
price of a call option will generally reflect increases in the market price of
the underlying security or currency, any loss resulting from the repurchase of
a call option is likely to be offset in whole or in part by appreciation of
the underlying security or currency owned by the Fund.
Writing Covered Put Options
The Fund may write American or European style covered put options and
purchase options to close out options previously written by the Fund. A put
option gives the purchaser of the option the right to sell, and the writer
(seller) has the obligation to buy, the underlying security or currency at the
exercise price during the option period (American style) or at the expiration
of the option (European style). So long as the obligation of the writer
continues, he may be assigned an exercise notice by the broker-dealer through
whom such option was sold, requiring him to make payment of the exercise price
against delivery of the underlying security or currency. The operation of put
options in other respects, including their related risks and rewards, is
substantially identical to that of call options.
The Fund would write put options only on a covered basis, which means
that the Fund would maintain in a segregated account cash, U.S. government
securities or other liquid high-grade debt obligations in an amount not less
than the exercise price or the Fund will own an option to sell the underlying
security or currency subject to the option having an exercise price equal to
or greater than the exercise price of the "covered" option at all times while
the put option is outstanding. (The rules of a clearing corporation currently
require that such assets be deposited in escrow to secure payment of the
exercise price.) The Fund would generally write covered put options in
circumstances where T. Rowe Price wishes to purchase the underlying security
or currency for the Fund's portfolio at a price lower than the current market
price of the security or currency. In such event the Fund would write a put
option at an exercise price which, reduced by the premium received on the
option, reflects the lower price it is willing to pay. Since the
PAGE 6
Fund would also receive interest on debt securities or currencies maintained
to cover the exercise price of the option, this technique could be used to
enhance current return during periods of market uncertainty. The risk in such
a transaction would be that the market price of the underlying security or
currency would decline below the exercise price less the premiums received.
Such a decline could be substantial and result in a significant loss to the
Fund. In addition, the Fund, because it does not own the specific securities
or currencies which it may be required to purchase in the exercise of the put,
can not benefit from appreciation, if any, with respect to such specific
securities or currencies. In order to comply with the requirements of several
states, the Fund will not write a covered put option if, as a result, the
aggregate market value of all portfolio securities or currencies covering put
or call options exceeds 25% of the market value of the Fund's net assets.
Should these state laws change or should the Fund obtain a waiver of their
application, the Fund reserves the right to increase this percentage. In
calculating the 25% limit, the Fund will offset, against the value of assets
covering written puts and calls, the value of purchased puts and calls on
identical securities or currencies with identical maturity dates.
Purchasing Put Options
The Fund may purchase American or European style put options. As the
holder of a put option, the Fund has the right to sell the underlying security
or currency at the exercise price at any time during the option period
(American style) or at the expiration of the option (European style). The
Fund may enter into closing sale transactions with respect to such options,
exercise them or permit them to expire. The Fund may purchase put options for
defensive purposes in order to protect against an anticipated decline in the
value of its securities or currencies. An example of such use of put options
is provided below.
The Fund may purchase a put option on an underlying security or currency
(a "protective put") owned by the Fund as a defensive technique in order to
protect against an anticipated decline in the value of the security or
currency. Such hedge protection is provided only during the life of the put
option when the Fund, as the holder of the put option, is able to sell the
underlying security or currency at the put exercise price regardless of any
decline in the underlying security's market price or currency's exchange
value. For example, a put option may be purchased in order to protect
unrealized appreciation of a security or currency where T. Rowe Price deems it
desirable to continue to hold the security or currency because of tax
considerations. The premium paid for the put option and any transaction costs
would reduce any capital gain otherwise available for distribution when the
security or currency is eventually sold.
The Fund may also purchase put options at a time when the Fund does not
own the underlying security or currency. By purchasing put options on a
security or currency it does not own, the Fund seeks to benefit from a decline
in the market price of the underlying security or currency. If the put option
is not sold when it has remaining value, and if the market price of the
underlying security or currency remains equal to or greater than the exercise
price during the life of the put option, the Fund will lose its entire
investment in the put option. In order for the purchase of a put option to be
profitable, the market price of the underlying security or currency must
decline sufficiently below the exercise price to cover the premium and
transaction costs, unless the put option is sold in a closing sale
transaction.
To the extent required by the laws of certain states, the Fund may not
be permitted to commit more than 5% of its assets to premiums when purchasing
put and call options. Should these state laws change or should the Fund
obtain a waiver of their application, the Fund may commit more than 5% of its
assets to premiums when purchasing call and put options. The premium paid by
the Fund when purchasing a put option will be recorded as an asset of the
Fund. This asset will be adjusted daily to the option's current market value,
which will be the latest sale price at the time at which the net asset value
per share of the Fund is computed (close of New York Stock Exchange), or, in
the absence of such sale, the latest bid price. This asset will be terminated
upon expiration of the option, the selling (writing) of an identical option in
a closing transaction, or the delivery of the underlying security or currency
upon the exercise of the option.
Purchasing Call Options
The Fund may purchase American or European call options. As the holder
of a call option, the Fund has the right to purchase the underlying security
or currency at the exercise price at any time during the
PAGE 7
option period (American style) or at the expiration of the option (European
style). The Fund may enter into closing sale transactions with respect to
such options, exercise them or permit them to expire. The Fund may purchase
call options for the purpose of increasing its current return or avoiding tax
consequences which could reduce its current return. The Fund may also
purchase call options in order to acquire the underlying securities or
currencies. Examples of such uses of call options are provided below.
Call options may be purchased by the Fund for the purpose of acquiring
the underlying securities or currencies for its portfolio. Utilized in this
fashion, the purchase of call options enables the Fund to acquire the
securities or currencies at the exercise price of the call option plus the
premium paid. At times the net cost of acquiring securities or currencies in
this manner may be less than the cost of acquiring the securities or
currencies directly. This technique may also be useful to the Fund in
purchasing a large block of securities or currencies that would be more
difficult to acquire by direct market purchases. So long as it holds such a
call option rather than the underlying security or currency itself, the Fund
is partially protected from any unexpected decline in the market price of the
underlying security or currency and in such event could allow the call option
to expire, incurring a loss only to the extent of the premium paid for the
option.
To the extent required by the laws of certain states, the Fund may not
be permitted to commit more than 5% of its assets to premiums when purchasing
call and put options. Should these state laws change or should the Fund
obtain a waiver of their application, the Fund may commit more than 5% of its
assets to premiums when purchasing call and put options. The Fund may also
purchase call options on underlying securities or currencies it owns in order
to protect unrealized gains on call options previously written by it. A call
option would be purchased for this purpose where tax considerations make it
inadvisable to realize such gains through a closing purchase transaction. Call
options may also be purchased at times to avoid realizing losses.
Dealer Options
The Fund may engage in transactions involving dealer options. Certain
risks are specific to dealer options. While the Fund would look to a clearing
corporation to exercise exchange-traded options, if the Fund were to purchase
a dealer option, it would rely on the dealer from whom it purchased the option
to perform if the option were exercised. Failure by the dealer to do so would
result in the loss of the premium paid by the Fund as well as loss of the
expected benefit of the transaction.
Exchange-traded options generally have a continuous liquid market while
dealer options have none. Consequently, the Fund will generally be able to
realize the value of a dealer option it has purchased only by exercising it or
reselling it to the dealer who issued it. Similarly, when the Fund writes a
dealer option, it generally will be able to close out the option prior to its
expiration only by entering into a closing purchase transaction with the
dealer to which the Fund originally wrote the option. While the Fund will
seek to enter into dealer options only with dealers who will agree to and
which are expected to be capable of entering into closing transactions with
the Fund, there can be no assurance that the Fund will be able to liquidate a
dealer option at a favorable price at any time prior to expiration. Until the
Fund, as a covered dealer call option writer, is able to effect a closing
purchase transaction, it will not be able to liquidate securities (or other
assets) used as cover until the option expires or is exercised. In the event
of insolvency of the contra party, the Fund may be unable to liquidate a
dealer option. With respect to options written by the Fund, the inability to
enter into a closing transaction may result in material losses to the Fund.
For example, since the Fund must maintain a secured position with respect to
any call option on a security it writes, the Fund may not sell the assets
which it has segregated to secure the position while it is obligated under the
option. This requirement may impair the Fund's ability to sell portfolio
securities at a time when such sale might be advantageous.
The Staff of the SEC has taken the position that purchased dealer
options and the assets used to secure the written dealer options are illiquid
securities. The Fund may treat the cover used for written OTC options as
liquid if the dealer agrees that the Fund may repurchase the OTC option it has
written for a maximum price to be calculated by a predetermined formula. In
such cases, the OTC option would be considered illiquid only to the extent the
maximum repurchase price under the formula exceeds the intrinsic
PAGE 8
value of the option. Accordingly, the Fund will treat dealer options as
subject to the Fund's limitation on unmarketable securities. If the SEC
changes its position on the liquidity of dealer options, the Fund will change
its treatment of such instrument accordingly.
Futures Contracts
Transactions in Futures
The Fund may enter into financial futures contracts, including stock
index, interest rate and currency futures ("futures or futures contracts").
Stock index futures contracts may be used to provide a hedge for a
portion of the Fund's portfolio, as a cash management tool, or as an efficient
way for T. Rowe Price to implement either an increase or decrease in portfolio
market exposure in response to changing market conditions. Stock index
futures contracts are currently traded with respect to the S&P 500 Index and
other broad stock market indices, such as the New York Stock Exchange
Composite Stock Index and the Value Line Composite Stock Index. The Fund may,
however, purchase or sell futures contracts with respect to any stock index.
Nevertheless, to hedge the Fund's portfolio successfully, the Fund must sell
futures contacts with respect to indices or subindices whose movements will
have a significant correlation with movements in the prices of the Fund's
portfolio securities.
Interest rate or currency futures contracts may be used as a hedge
against changes in prevailing levels of interest rates or currency exchange
rates in order to establish more definitely the effective return on securities
or currencies held or intended to be acquired by the Fund. In this regard,
the Fund could sell interest rate or currency futures as an offset against the
effect of expected increases in interest rates or currency exchange rates and
purchase such futures as an offset against the effect of expected declines in
interest rates or currency exchange rates. Futures can also be used as an
efficient means of regulating the Fund's exposure to the market.
The Fund will enter into futures contracts which are traded on national
or foreign futures exchanges and are standardized as to maturity date and
underlying financial instrument. The principal financial futures exchanges in
the United States are the Board of Trade of the City of Chicago, the Chicago
Mercantile Exchange, the New York Futures Exchange, and the Kansas City Board
of Trade. Futures exchanges and trading in the United States are regulated
under the Commodity Exchange Act by the Commodity Futures Trading Commission
("CFTC"). Futures are traded in London at the London International Financial
Futures Exchange, in Paris at the MATIF and in Tokyo at the Tokyo Stock
Exchange. Although techniques other than the sale and purchase of futures
contracts could be used for the above-referenced purposes, futures contracts
offer an effective and relatively low cost means of implementing the Fund's
objectives in these areas.
Regulatory Limitations
The Fund will engage in transactions in futures contracts and options
thereon only for bona fide hedging, yield enhancement and risk management
purposes, in each case in accordance with the rules and regulations of the
CFTC, and not for speculation.
The Fund may not enter into futures contracts or options thereon if
immediately thereafter the sum of the amounts of initial margin deposits on
the Fund's existing futures and premiums paid for options on futures would
exceed 5% of the market value of the Fund's total assets; provided, however,
that in the case of an option that is in-the-money at the time of purchase,
the in-the-money amount may be excluded in calculating the 5% limitation.
In instances involving the purchase of futures contracts or call options
thereon or the writing of put options thereon by the Fund, an amount of cash,
U.S. government securities or other liquid, high-grade debt obligations, equal
to the market value of the futures contracts and options thereon (less any
related margin deposits), will be deposited in a segregated account with the
Fund's custodian to cover the position, or
PAGE 9
alternative cover will be employed thereby insuring that the use of such
futures contracts and options is unleveraged.
In addition, CFTC regulations may impose limitations on the Fund's
ability to engage in certain yield enhancement and risk management strategies.
If the CFTC or other regulatory authorities adopt different (including less
stringent) or additional restrictions, the Fund would comply with such new
restrictions.
Trading in Futures
A futures contract provides for the future sale by one party and
purchase by another party of a specified amount of a specific financial
instrument (e.g., units of a stock index) for a specified price, date, time
and place designated at the time the contract is made. Brokerage fees are
incurred when a futures contract is bought or sold and margin deposits must be
maintained. Entering into a contract to buy is commonly referred to as buying
or purchasing a contract or holding a long position. Entering into a contract
to sell is commonly referred to as selling a contract or holding a short
position.
Unlike when the Fund purchases or sells a security, no price would be
paid or received by the Fund upon the purchase or sale of a futures contract.
Upon entering into a futures contract, and to maintain the Fund's open
positions in futures contracts, the Fund would be required to deposit with its
custodian in a segregated account in the name of the futures broker an amount
of cash, U.S. government securities, suitable money market instruments, or
liquid, high-grade debt securities, known as "initial margin." The margin
required for a particular futures contract is set by the exchange on which the
contract is traded, and may be significantly modified from time to time by the
exchange during the term of the contract. Futures contracts are customarily
purchased and sold on margins that may range upward from less than 5% of the
value of the contract being traded.
If the price of an open futures contract changes (by increase in the
case of a sale or by decrease in the case of a purchase) so that the loss on
the futures contract reaches a point at which the margin on deposit does not
satisfy margin requirements, the broker will require an increase in the
margin. However, if the value of a position increases because of favorable
price changes in the futures contract so that the margin deposit exceeds the
required margin, the broker will pay the excess to the Fund.
These subsequent payments, called "variation margin," to and from the
futures broker, are made on a daily basis as the price of the underlying
assets fluctuate making the long and short positions in the futures contract
more or less valuable, a process known as "marking to the market." The Fund
expects to earn interest income on its margin deposits.
Although certain futures contracts, by their terms, require actual
future delivery of and payment for the underlying instruments, in practice
most futures contracts are usually closed out before the delivery date.
Closing out an open futures contract purchase or sale is effected by entering
into an offsetting futures contract purchase or sale, respectively, for the
same aggregate amount of the identical securities and the same delivery date.
If the offsetting purchase price is less than the original sale price, the
Fund realizes a gain; if it is more, the Fund realizes a loss. Conversely, if
the offsetting sale price is more than the original purchase price, the Fund
realizes a gain; if it is less, the Fund realizes a loss. The transaction
costs must also be included in these calculations. There can be no assurance,
however, that the Fund will be able to enter into an offsetting transaction
with respect to a particular futures contract at a particular time. If the
Fund is not able to enter into an offsetting transaction, the Fund will
continue to be required to maintain the margin deposits on the futures
contract.
For example, the Standard & Poor's 500 Stock Index is composed of 500
selected common stocks, most of which are listed on the New York Stock
Exchange. The S&P 500 Index assigns relative weightings to the common stocks
included in the Index, and the Index fluctuates with changes in the market
values of those common stocks. In the case of the S&P 500 Index, contracts
are to buy or sell 500 units. Thus, if the value of the S&P 500 Index were
$150, one contract would be worth $75,000 (500 units x $150). The stock index
futures contract specifies that no delivery of the actual stock making up the
index will take place. Instead, settlement in cash occurs. Over the life of
the contract, the gain or loss realized by the Fund
PAGE 10
will equal the difference between the purchase (or sale) price of the contract
and the price at which the contract is terminated. For example, if the Fund
enters into a futures contract to buy 500 units of the S&P 500 Index at a
specified future date at a contract price of $150 and the S&P 500 Index is at
$154 on that future date, the Fund will gain $2,000 (500 units x gain of $4).
If the Fund enters into a futures contract to sell 500 units of the stock
index at a specified future date at a contract price of $150 and the S&P 500
Index is at $152 on that future date, the Fund will lose $1,000 (500 units x
loss of $2).
Special Risks of Transactions in Futures Contracts
Volatility and Leverage. The prices of futures contracts are volatile
and are influenced, among other things, by actual and anticipated changes in
the market and interest rates, which in turn are affected by fiscal and
monetary policies and national and international policies and economic events.
Most United States futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. The daily
limit establishes the maximum amount that the price of a futures contract may
vary either up or down from the previous day's settlement price at the end of
a trading session. Once the daily limit has been reached in a particular type
of futures contract, no trades may be made on that day at a price beyond that
limit. The daily limit governs only price movement during a particular trading
day and therefore does not limit potential losses, because the limit may
prevent the liquidation of unfavorable positions. Futures contract prices
have occasionally moved to the daily limit for several consecutive trading
days with little or no trading, thereby preventing prompt liquidation of
futures positions and subjecting some futures traders to substantial losses.
Because of the low margin deposits required, futures trading involves an
extremely high degree of leverage. As a result, a relatively small price
movement in a futures contract may result in immediate and substantial loss,
as well as gain, to the investor. For example, if at the time of purchase,
10% of the value of the futures contract is deposited as margin, a subsequent
10% decrease in the value of the futures contract would result in a total loss
of the margin deposit, before any deduction for the transaction costs, if the
account were then closed out. A 15% decrease would result in a loss equal to
150% of the original margin deposit, if the contract were closed out. Thus, a
purchase or sale of a futures contract may result in losses in excess of the
amount invested in the futures contract. However, the Fund would presumably
have sustained comparable losses if, instead of the futures contract, it had
invested in the underlying instrument and sold it after the decline.
Furthermore, in the case of a futures contract purchase, in order to be
certain that the Fund has sufficient assets to satisfy its obligations under a
futures contract, the Fund earmarks to the futures contract money market
instruments equal in value to the current value of the underlying instrument
less the margin deposit.
Liquidity. The Fund may elect to close some or all of its futures
positions at any time prior to their expiration. The Fund would do so to
reduce exposure represented by long futures positions or increase exposure
represented by short futures positions. The Fund may close its positions by
taking opposite positions which would operate to terminate the Fund's position
in the futures contracts. Final determinations of variation margin would then
be made, additional cash would be required to be paid by or released to the
Fund, and the Fund would realize a loss or a gain.
Futures contracts may be closed out only on the exchange or board of
trade where the contracts were initially traded. Although the Fund intends to
purchase or sell futures contracts only on exchanges or boards of trade where
there appears to be an active market, there is no assurance that a liquid
market on an exchange or board of trade will exist for any particular contract
at any particular time. In such event, it might not be possible to close a
futures contract, and in the event of adverse price movements, the Fund would
continue to be required to make daily cash payments of variation margin.
However, in the event futures contracts have been used to hedge the underlying
instruments, the Fund would continue to hold the underlying instruments
subject to the hedge until the futures contracts could be terminated. In such
circumstances, an increase in the price of the underlying instruments, if any,
might partially or completely offset losses on the futures contract. However,
as described below, there is no guarantee that the price of the underlying
instruments will, in fact, correlate with the price movements in the futures
contract and thus provide an offset to losses on a futures contract.
PAGE 11
Hedging Risk. A decision of whether, when, and how to hedge involves
skill and judgment, and even a well-conceived hedge may be unsuccessful to
some degree because of unexpected market behavior, market or interest rate
trends. There are several risks in connection with the use by the Fund of
futures contracts as a hedging device. One risk arises because of the
imperfect correlation between movements in the prices of the futures contracts
and movements in the prices of the underlying instruments which are the
subject of the hedge. T. Rowe Price will, however, attempt to reduce this
risk by entering into futures contracts whose movements, in its judgment, will
have a significant correlation with movements in the prices of the Fund's
underlying instruments sought to be hedged.
Successful use of futures contracts by the Fund for hedging purposes is
also subject to T. Rowe Price's ability to correctly predict movements in the
direction of the market. It is possible that, when the Fund has sold futures
to hedge its portfolio against a decline in the market, the index, indices, or
underlying instruments on which the futures are written might advance and the
value of the underlying instruments held in the Fund's portfolio might
decline. If this were to occur, the Fund would lose money on the futures and
also would experience a decline in value in its underlying instruments.
However, while this might occur to a certain degree, T. Rowe Price believes
that over time the value of the Fund's portfolio will tend to move in the same
direction as the market indices which are intended to correlate to the price
movements of the underlying instruments sought to be hedged. It is also
possible that if the Fund were to hedge against the possibility of a decline
in the market (adversely affecting the underlying instruments held in its
portfolio) and prices instead increased, the Fund would lose part or all of
the benefit of increased value of those underlying instruments that it has
hedged, because it would have offsetting losses in its futures positions. In
addition, in such situations, if the Fund had insufficient cash, it might have
to sell underlying instruments to meet daily variation margin requirements.
Such sales of underlying instruments might be, but would not necessarily be,
at increased prices (which would reflect the rising market). The Fund might
have to sell underlying instruments at a time when it would be disadvantageous
to do so.
In addition to the possibility that there might be an imperfect
correlation, or no correlation at all, between price movements in the futures
contracts and the portion of the portfolio being hedged, the price movements
of futures contracts might not correlate perfectly with price movements in the
underlying instruments due to certain market distortions. First, all
participants in the futures market are subject to margin deposit and
maintenance requirements. Rather than meeting additional margin deposit
requirements, investors might close futures contracts through offsetting
transactions which could distort the normal relationship between the
underlying instruments and futures markets. Second, the margin requirements
in the futures market are less onerous than margin requirements in the
securities markets, and as a result the futures market might attract more
speculators than the securities markets do. Increased participation by
speculators in the futures market might also cause temporary price
distortions. Due to the possibility of price distortion in the futures market
and also because of the imperfect correlation between price movements in the
underlying instruments and movements in the prices of futures contracts, even
a correct forecast of general market trends by T. Rowe Price might not result
in a successful hedging transaction over a very short time period.
Options on Futures Contracts
Options on futures are similar to options on underlying instruments
except that options on futures give the purchaser the right, in return for the
premium paid, to assume a position in a futures contract (a long position if
the option is a call and a short position if the option is a put), rather than
to purchase or sell the futures contract, at a specified exercise price at any
time during the period of the option. Upon exercise of the option, the
delivery of the futures position by the writer of the option to the holder of
the option will be accompanied by the delivery of the accumulated balance in
the writer's futures margin account which represents the amount by which the
market price of the futures contract, at exercise, exceeds (in the case of a
call) or is less than (in the case of a put) the exercise price of the option
on the futures contract. Alternatively, settlement may be made totally in
cash. Purchasers of options who fail to exercise their options prior to the
exercise date suffer a loss of the premium paid.
PAGE 12
As an alternative to writing or purchasing call and put options on stock
index futures, the Fund may write or purchase call and put options on stock
indices. Such options would be used in a manner similar to the use of options
on futures contracts. From time to time, a single order to purchase or sell
futures contracts (or options thereon) may be made on behalf of the Fund and
other T. Rowe Price Funds. Such aggregated orders would be allocated among
the Fund and the other T. Rowe Price Funds in a fair and non-discriminatory
manner.
Special Risks of Transactions in Options on Futures Contracts
The Fund may seek to close out an option position by writing or buying
an offsetting option covering the same index, underlying instruments, or
contract and having the same exercise price and expiration date. The ability
to establish and close out positions on such options will be subject to the
maintenance of a liquid secondary market. Reasons for the absence of a liquid
secondary market on an exchange include the following: (i) there may be
insufficient trading interest in certain options; (ii) restrictions may be
imposed by an exchange on opening transactions or closing transactions or
both; (iii) trading halts, suspensions or other restrictions may be imposed
with respect to particular classes or series of options, or underlying
instruments; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or a clearing
corporation may not at all times be adequate to handle current trading volume;
or (vi) one or more exchanges could, for economic or other reasons, decide or
be compelled at some future date to discontinue the trading of options (or a
particular class or series of options), in which event the secondary market on
that exchange (or in the class or series of options) would cease to exist,
although outstanding options on the exchange that had been issued by a
clearing corporation as a result of trades on that exchange would continue to
be exercisable in accordance with their terms. There is no assurance that
higher than anticipated trading activity or other unforeseen events might not,
at times, render certain of the facilities of any of the clearing corporations
inadequate, and thereby result in the institution by an exchange of special
procedures which may interfere with the timely execution of customers' orders.
Additional Futures and Options Contracts
Although the Fund has no current intention of engaging in financial
futures or options transactions other than those described above, it reserves
the right to do so. Such futures or options trading might involve risks which
differ from those involved in the futures and options described above.
Foreign Futures and Options
Participation in foreign futures and foreign options transactions
involves the execution and clearing of trades on or subject to the rules of a
foreign board of trade. Neither the National Futures Association nor any
domestic exchange regulates activities of any foreign boards of trade,
including the execution, delivery and clearing of transactions, or has the
power to compel enforcement of the rules of a foreign board of trade or any
applicable foreign law. This is true even if the exchange is formally linked
to a domestic market so that a position taken on the market may be liquidated
by a transaction on another market. Moreover, such laws or regulations will
vary depending on the foreign country in which the foreign futures or foreign
options transaction occurs. For these reasons, customers who trade foreign
futures or foreign options contracts may not be afforded certain of the
protective measures provided by the Commodity Exchange Act, the CFTC's
regulations and the rules of the National Futures Association and any domestic
exchange, including the right to use reparations proceedings before the
Commission and arbitration proceedings provided by the National Futures
Association or any domestic futures exchange. In particular, funds received
from customers for foreign futures or foreign options transactions may not be
provided the same protections as funds received in respect of transactions on
United States futures exchanges. In addition, the price of any foreign
futures or foreign options contract and, therefore, the potential profit and
loss thereon may be affected by any variance in the foreign exchange rate
between the time your order is placed and the time it is liquidated, offset or
exercised.
PAGE 13
Lending of Portfolio Securities
For the purpose of realizing additional income, the Fund may make
secured loans of portfolio securities amounting to not more than 30% of its
total assets. This policy is a fundamental policy. Securities loans are made
to broker-dealers, institutional investors, or other persons pursuant to
agreements requiring that the loans be continuously secured by collateral at
least equal at all times to the value of the securities lent marked to market
on a daily basis. The collateral received will consist of cash, U.S.
government securities, letters of credit or such other collateral as may be
permitted under its investment program. While the securities are being lent,
the Fund will continue to receive the equivalent of the interest or dividends
paid by the issuer on the securities, as well as interest on the investment of
the collateral or a fee from the borrower. The Fund has a right to call each
loan and obtain the securities on five business days' notice or, in connection
with securities trading on foreign markets, within such longer period of time
which coincides with the normal settlement period for purchases and sales of
such securities in such foreign markets. The Fund will not have the right to
vote securities while they are being lent, but it will call a loan in
anticipation of any important vote. The risks in lending portfolio
securities, as with other extensions of secured credit, consist of possible
delay in receiving additional collateral or in the recovery of the securities
or possible loss of rights in the collateral should the borrower fail
financially. Loans will only be made to persons deemed by T. Rowe Price to be
of good standing and will not be made unless, in the judgment of T. Rowe
Price, the consideration to be earned from such loans would justify the risk.
Other Lending/Borrowing
Subject to approval by the Securities and Exchange Commission, the Fund
may make loans to, or borrow funds from, other mutual funds sponsored or
advised by T. Rowe Price or Rowe Price-Fleming International, Inc.
(collectively, "Price Funds"). The Fund has no current intention of engaging
in these practices at this time.
Foreign Securities
The Fund may invest in U.S. dollar-denominated and non U.S. dollar-
denominated securities of foreign issuers in developed countries. The Fund
currently intends to limit any such investment to not more than 10% of its
assets. Because the Fund may invest in foreign securities, investment in the
Fund involves risks that are different in some respects from an investment in
a fund which invests only in securities of U.S. domestic issuers. Foreign
investments may be affected favorably or unfavorably by changes in currency
rates and exchange control regulations. There may be less publicly available
information about a foreign company than about a U.S. company, and foreign
companies may not be subject to accounting, auditing, and financial reporting
standards and requirements comparable to those applicable to U.S. companies.
There may be less governmental supervision of securities markets, brokers and
issuers of securities. Securities of some foreign companies are less liquid
or more volatile than securities of U.S. companies, and foreign brokerage
commissions and custodian fees are generally higher than in the United States.
Settlement practices may include delays and may differ from those customary in
United States markets. Investments in foreign securities may also be subject
to other risks different from those affecting U.S. investments, including
local political or economic developments, expropriation or nationalization of
assets, restrictions on foreign investment and repatriation of capital,
imposition of withholding taxes on dividend or interest payments, currency
blockage (which would prevent cash from being brought back to the United
States), and difficulty in enforcing legal rights outside the U.S.
Foreign Currency Transactions
A forward foreign currency exchange contract involves an obligation to
purchase or sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract agreed upon by the parties, at a
price set at the time of the contract. These contracts are principally traded
in the interbank market conducted directly between currency traders (usually
large, commercial banks) and their customers. A forward contract generally
has no deposit requirement, and no commissions are charged at any stage for
trades.
PAGE 14
The Fund will generally enter into forward foreign currency exchange
contracts under two circumstances. First, when the Fund enters into a
contract for the purchase or sale of a security denominated in a foreign
currency, it may desire to "lock in" the U.S. dollar price of the security.
By entering into a forward contract for the purchase or sale, for a fixed
amount of dollars, of the amount of foreign currency involved in the
underlying security transactions, the Fund will be able to protect itself
against a possible loss resulting from an adverse change in the relationship
between the U.S. dollar and the subject foreign currency during the period
between the date the security is purchased or sold and the date on which
payment is made or received.
Second, when T. Rowe Price believes that the currency of a particular
foreign country may suffer or enjoy a substantial movement against another
currency, including the U.S. dollar, it may enter into a forward contract to
sell or buy the amount of the former foreign currency, approximating the value
of some or all of the Fund's portfolio securities denominated in such foreign
currency. Alternatively, where appropriate, the Fund may hedge all or part of
its foreign currency exposure through the use of a basket of currencies or a
proxy currency where such currency or currencies act as an effective proxy for
other currencies. In such a case, the Fund may enter into a forward contract
where the amount of the foreign currency to be sold exceeds the value of the
securities denominated in such currency. The use of this basket hedging
technique may be more efficient and economical than entering into separate
forward contracts for each currency held in the Fund. The precise matching of
the forward contract amounts and the value of the securities involved will not
generally be possible since the future value of such securities in foreign
currencies will change as a consequence of market movements in the value of
those securities between the date the forward contract is entered into and the
date it matures. The projection of short-term currency market movement is
extremely difficult, and the successful execution of a short-term hedging
strategy is highly uncertain. Other than as set forth above, and immediately
below, the Fund will also not enter into such forward contracts or maintain a
net exposure to such contracts where the consummation of the contracts would
obligate the Fund to deliver an amount of foreign currency in excess of the
value of the Fund's portfolio securities or other assets denominated in that
currency. The Fund, however, in order to avoid excess transactions and
transaction costs, may maintain a net exposure to forward contracts in excess
of the value of the Fund's portfolio securities or other assets to which the
forward contracts relate (including accrued interest to the maturity of the
forward on such securities), provided the excess amount is "covered" by
liquid, high-grade debt securities, denominated in any currency, at least
equal at all times to the amount of such excess. For these purposes, "the
securities or other assets to which the forward contracts relate" may be
securities or assets denominated in a single currency, or where proxy forwards
are used, securities denominated in more than one currency. Under normal
circumstances, consideration of the prospect for currency parities will be
incorporated into the longer term investment decisions made with regard to
overall diversification strategies. However, T. Rowe Price believes that it
is important to have the flexibility to enter into such forward contracts when
it determines that the best interests of the Fund will be served.
At the maturity of a forward contract, the Fund may either sell the
portfolio security and make delivery of the foreign currency, or it may retain
the security and terminate its contractual obligation to deliver the foreign
currency by purchasing an "offsetting" contract obligating it to purchase, on
the same maturity date, the same amount of the foreign currency.
As indicated above, it is impossible to forecast with absolute precision
the market value of portfolio securities at the expiration of the forward
contract. Accordingly, it may be necessary for the Fund to purchase
additional foreign currency on the spot market (and bear the expense of such
purchase) if the market value of the security is less than the amount of
foreign currency the Fund is obligated to deliver and if a decision is made to
sell the security and make delivery of the foreign currency. Conversely, it
may be necessary to sell on the spot market some of the foreign currency
received upon the sale of the portfolio security if its market value exceeds
the amount of foreign currency the Fund is obligated to deliver. However, as
noted, in order to avoid excessive transactions and transaction costs, the
Fund may use liquid, high-grade debt securities denominated in any currency,
to cover the amount by which the value of a forward contract exceeds the value
of the securities to which it relates.
PAGE 15
If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss (as described below) to the
extent that there has been movement in forward contract prices. If the Fund
engages in an offsetting transaction, it may subsequently enter into a new
forward contract to sell the foreign currency. Should forward prices decline
during the period between the Fund's entering into a forward contract for the
sale of a foreign currency and the date it enters into an offsetting contract
for the purchase of the foreign currency, the Fund will realize a gain to the
extent the price of the currency it has agreed to sell exceeds the price of
the currency it has agreed to purchase. Should forward prices increase, the
Fund will suffer a loss to the extent of the price of the currency it has
agreed to purchase exceeds the price of the currency it has agreed to sell.
The Fund's dealing in forward foreign currency exchange contracts will
generally be limited to the transactions described above. However, the Fund
reserves the right to enter into forward foreign currency contracts for
different purposes and under different circumstances. Of course, the Fund is
not required to enter into forward contracts with regard to its foreign
currency-denominated securities and will not do so unless deemed appropriate
by T. Rowe Price. It also should be realized that this method of hedging
against a decline in the value of a currency does not eliminate fluctuations
in the underlying prices of the securities. It simply establishes a rate of
exchange at a future date. Additionally, although such contracts tend to
minimize the risk of loss due to a decline in the value of the hedged
currency, at the same time, they tend to limit any potential gain which might
result from an increase in the value of that currency.
Although the Fund values its assets daily in terms of U.S. dollars, it
does not intend to convert its holdings of foreign currencies into U.S.
dollars on a daily basis. It will do so from time to time, and investors
should be aware of the costs of currency conversion. Although foreign
exchange dealers do not charge a fee for conversion, they do realize a profit
based on the difference (the "spread") between the prices at which they are
buying and selling various currencies. Thus, a dealer may offer to sell a
foreign currency to the Fund at one rate, while offering a lesser rate of
exchange should the Fund desire to resell that currency to the dealer.
Federal Tax Treatment of Options, Futures Contracts and Forward Foreign
Exchange Contracts
The Fund may enter into certain option, futures, and forward foreign
exchange contracts, including options and futures on currencies, which will be
treated as Section 1256 contracts or straddles.
Transactions which are considered Section 1256 contracts will be
considered to have been closed at the end of the Fund's fiscal year and any
gains or losses will be recognized for tax purposes at that time. Such gains
or losses from the normal closing or settlement of such transactions will be
characterized as 60% long-term capital gain or loss and 40% short-term capital
gain or loss regardless of the holding period of the instrument. The Fund
will be required to distribute net gains on such transactions to shareholders
even though it may not have closed the transaction and received cash to pay
such distributions.
Options, futures and forward foreign exchange contracts, including
options and futures on currencies, which offset a foreign dollar denominated
bond or currency position may be considered straddles for tax purposes in
which case a loss on any position in a straddle will be subject to deferral to
the extent of unrealized gain in an offsetting position. The holding period
of the securities or currencies comprising the straddle will be deemed not to
begin until the straddle is terminated. For securities offsetting a purchased
put, this adjustment of the holding period may increase the gain from sales of
securities held less than three months. The holding period of the security
offsetting an "in-the-money qualified covered call" option on an equity
security will not include the period of time the option is outstanding.
Losses on written covered calls and purchased puts on securities,
excluding certain "qualified covered call" options on equity securities, may
be long-term capital loss, if the security covering the option was held for
more than twelve months prior to the writing of the option.
In order for the Fund to continue to qualify for federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying
PAGE 16
income; i.e., dividends, interest, income derived from loans of securities,
and gains from the sale of securities or currencies. Pending tax regulations
could limit the extent that net gain realized from option, futures or foreign
forward exchange contracts on currencies is qualifying income for purposes of
the 90% requirement. In addition, gains realized on the sale or other
disposition of securities, including option, futures or foreign forward
exchange contracts on securities or securities indexes and, in some cases,
currencies, held for less than three months, must be limited to less than 30%
of the Fund's annual gross income. In order to avoid realizing excessive
gains on securities or currencies held less than three months, the Fund may be
required to defer the closing out of option, futures or foreign forward
exchange contracts beyond the time when it would otherwise be advantageous to
do so. It is anticipated that unrealized gains on Section 1256 option,
futures and foreign forward exchange contracts, which have been open for less
than three months as of the end of the Fund's fiscal year and which are
recognized for tax purposes, will not be considered gains on securities or
currencies held less than three months for purposes of the 30% test.
Hybrid Commodity and Security Instruments
Recently, instruments have been developed which combine the elements of
futures contracts or options with those of debt, preferred equity or a
depository instrument (hereinafter "Hybrid Instruments"). Often these Hybrid
Instruments are indexed to the price of a commodity or particular currency.
Hybrid Instruments may take a variety of forms, including, but not limited to,
debt instruments with interest or principal payments or redemption terms
determined by reference to the value of a currency or commodity at a future
point in time, preferred stock with dividend rates determined by reference to
the value of a currency, or convertible securities with the conversion terms
related to a particular commodity.
The risks of investing in Hybrid Instruments reflect a combination of
the risks from investing in securities, futures and currencies, including
volatility and lack of liquidity. Reference is made to the discussion of
futures on page 8, forward contracts on page 15 and options on page 3 for a
discussion of these risks. Further, the prices of the Hybrid Instrument and
the related commodity or currency may not move in the same direction or at the
same time. Hybrid Instruments may bear interest or pay preferred dividends at
below market (or even relatively nominal) rates. In addition, because the
purchase and sale of Hybrid Instruments could take place in an over-the-
counter market or in a private transaction between the Fund and the seller of
the Hybrid Instrument, the creditworthiness of the contra party to the
transaction would be a risk factor which the Fund would have to consider.
Hybrid Instruments also may not be subject to regulation of the CFTC, which
generally regulates the trading of commodity futures by U.S. persons, the SEC,
which regulates the offer and sale of securities by and to U.S. persons, or
any other governmental regulatory authority.
Illiquid Securities
The Fund may invest in illiquid securities, including repurchase
agreements which do not provide for payment within seven days, but will not
acquire such securities if, as a result, they would comprise more than 15% of
the value of the Fund's net assets.
Restricted securities may be sold only in privately negotiated
transactions or in a public offering with respect to which a registration
statement is in effect under the Securities Act of 1933 (the "1933 Act").
Where registration is required, the Fund may be obligated to pay all or part
of the registration expenses and a considerable period may elapse between the
time of the decision to sell and the time the Fund may be permitted to sell a
security under an effective registration statement. If, during such a period,
adverse market conditions were to develop, the Fund might obtain a less
favorable price than prevailed when it decided to sell. Restricted securities
will be priced at fair value as determined in accordance with procedures
prescribed by the Board of Directors. If through the appreciation of illiquid
securities or the depreciation of liquid securities, the Fund should be in a
position where more than 15% of the value of its net assets are invested in
illiquid assets, including restricted securities, the Fund will take
appropriate steps to protect liquidity.
PAGE 17
The Fund may purchase securities which while privately placed, are
eligible for purchase and sale under Rule 144A under the 1933 Act. This rule
permits certain qualified institutional buyers, such as the Fund, to trade in
privately placed securities even though such securities are not registered
under the 1933 Act. T. Rowe Price, under the supervision of the Fund's Board
of Directors, will consider whether securities purchased under Rule 144A are
illiquid and thus subject to the Fund's restriction of investing no more than
15% of its assets in illiquid securities. A determination of whether a Rule
144A security is liquid or not is a question of fact. In making this
determination, T. Rowe Price will consider the trading markets for the
specific security taking into account the unregistered nature of a Rule 144A
security. In addition, T. Rowe Price could consider the (1) frequency of
trades and quotes, (2) number of dealers and potential purchases, (3) dealer
undertakings to make a market, and (4) the nature of the security and of
marketplace trades (e.g., the time needed to dispose of the security, the
method of soliciting offers and the mechanics of transfer). The liquidity of
Rule 144A securities would be monitored, and if as a result of changed
conditions it is determined that a Rule 144A security is no longer liquid, the
Fund's holdings of illiquid securities would be reviewed to determine what, if
any, steps are required to assure that the Fund does not invest more than 15%
of its assets in illiquid securities. Investing in Rule 144A securities could
have the effect of increasing the amount of the Fund's assets invested in
illiquid securities if qualified institutional buyers are unwilling to
purchase such securities.
Repurchase Agreements
The Fund may enter into repurchase agreements through which an investor
(such as the Fund) purchases a security (known as the "underlying security")
from a well-established securities dealer or a bank which is a member of the
Federal Reserve System. Any such dealer or bank will be on T. Rowe Price's
approved list and have a credit rating with respect to its short-term debt of
at least A1 by Standard & Poor's Corporation, P1 by Moody's Investors Service,
Inc., or the equivalent rating by T. Rowe Price. At that time, the bank or
securities dealer agrees to repurchase the underlying security at the same
price, plus specified interest. Repurchase agreements are generally for a
short period of time, often less than a week. The Fund will not enter into a
repurchase agreement which does not provide for payment within seven days if,
as a result, more than 10% of the value of its net assets would then be
invested in such repurchase agreements. The Fund will only enter into
repurchase agreements where (i) the underlying securities are of the type
(excluding maturity limitations) which the Fund's investment guidelines would
allow it to purchase directly, (ii) the market value of the underlying
security, including interest accrued, will be at all times equal to or exceed
the value of the repurchase agreement, and (iii) payment for the underlying
security is made only upon physical delivery or evidence of book-entry
transfer to the account of the custodian or a bank acting as agent. In the
event of a bankruptcy or other default of a seller of a repurchase agreement,
the Fund could experience both delays in liquidating the underlying securities
and losses, including: (a) possible decline in the value of the underlying
security during the period while the Fund seeks to enforce its rights thereto;
(b) possible subnormal levels of income and lack of access to income during
this period; and (c) expenses of enforcing its rights.
Other Investments
Although the Fund's assets are invested primarily in common stocks, the
Fund may invest in convertible securities, corporate debt securities and
preferred stocks which hold the prospect of contributing to the achievement of
the Fund's objectives. The Fund may purchase corporate debt securities within
the four highest credit categories assigned by established rating agencies,
which include both high and medium quality investment grade corporate debt
securities. Medium quality securities (rated BBB by Moody's Investors
Service, Inc. ("Moody's" or Baa by Standard & Poor's Corporation ("S&P"), or
unrated securities of equivalent quality) are regarded as having an adequate
capacity to pay principal and interest, although adverse economic conditions
or changing circumstances are more likely to lead to a weakening of such
capacity than for bonds in the A category. The Fund may invest up to 5% of
its total assets in non-investment grade debt securities. The above described
quality standards will not be applied to the Fund's investments in convertible
securities.
PAGE 18
INVESTMENT RESTRICTIONS
Fundamental policies of the Fund may not be changed without the approval
of the lesser of (1) 67% of the Fund's shares present at a meeting of
shareholders if the holders of more than 50% of the outstanding shares are
present in person or by proxy or (2) more than 50% of the Fund's outstanding
shares. Other restrictions, in the form of operating policies, are subject to
change by the Fund's Board of Directors without shareholder approval. Any
investment restriction which involves a maximum percentage of securities or
assets shall not be considered to be violated unless an excess over the
percentage occurs immediately after, and is caused by, an acquisition of
securities or assets of, or borrowings by, the Fund.
Fundamental Policies
As a matter of fundamental policy, the Fund may not:
(1) Borrowing. Borrow money, except the Fund may borrow for non-
leveraging, temporary purposes from banks or other Price
Funds (1) in amounts not exceeding 30% of its total assets to
meet redemption requests which might otherwise require
untimely disposition of portfolio securities; or (2) in
amounts not exceeding 5% of its total assets for emergency,
administrative or other proper purposes. Interest paid on
any such borrowings will reduce net investment income. The
Fund may enter into futures contracts as set forth in (3)
below;
(2) Commodities. Purchase or sell commodities or commodity
contracts; except that it may (i) enter into futures
contracts and options on futures contracts, subject to (3)
below; (ii) enter into forward foreign currency exchange
contracts (although the Fund does not consider such contracts
to be commodities); and (iii) invest in instruments which
have the characteristics of both futures contracts and
securities;
(3) Futures Contracts. Enter into a futures contract or an
option thereon, although the Fund may enter into financial
and currency futures contracts or options on financial and
currency futures contracts;
(4) Industry Concentration. Purchase the securities of any
issuer if, as a result, more than 25% of the value of the
Fund's total assets would be invested in the securities of
issuers having their principal business activities in the
same industry (other than obligations issued or guaranteed by
the U.S. Government, its agencies or instrumentalities);
(5) Loans. Make loans, although the Fund may (i) purchase money
market securities and enter into repurchase agreements; (ii)
acquire publicly-distributed bonds, debentures, notes and
other debt securities and purchase debt securities at private
placements; (iii) lend portfolio securities; and (iv)
participate in an interfund lending program with other Price
Funds provided that no such loan may be made if, as a result,
the aggregate of such loans would exceed 30% of the value of
the Fund's total assets;
(6) Margin. Purchase securities on margin, except (i) for use of
short-term credit necessary for clearance of purchases of
portfolio securities and (ii) it may make margin deposits in
connection with futures contracts or other permissible
investments;
(7) Percent Limit on Assets Invested in Any One Issuer. Purchase
a security if, as a result, with respect to 75% of the value
of its total assets, more than 5% of the value of the Fund's
total assets would be invested in the securities of a single
issuer, except securities issued or guaranteed by the U.S.
Government or any of its agencies or instrumentalities;
PAGE 19
(8) Percent Limit on Share Ownership of Any One Issuer. Purchase
a security if, as a result, with respect to 75% of the value
of the Fund's total assets, more than 10% of the outstanding
voting securities of any issuer would be held by the Fund
(other than obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities);
(9) Real Estate. Purchase or sell real estate or real estate
limited partnerships (although it may purchase securities
secured by real estate or interests therein, or issued by
companies or investment trusts which invest in real estate or
interests therein);
(10) Senior Securities. Issue senior securities except in
compliance with the Investment Company Act of 1940; or
(11) Underwriting. Underwrite securities issued by other persons,
except to the extent that the Fund may be deemed to be an
underwriter within the meaning of the Securities Act of 1933
in connection with the purchase and sale of its portfolio
securities in the ordinary course of pursuing its investment
program.
Operating Policies
As a matter of operating policy, the Fund may not:
(1) Borrowing. The Fund will not purchase additional securities
when money borrowed exceeds 5% of the Fund's total assets.
(2) Control of Portfolio Companies. Invest in companies for the
purpose of exercising management or control;
(3) Illiquid Securities. Purchase illiquid securities and
securities of unseasoned issuers if, as a result, in total
more than 15% of its net assets would be invested in such
securities, including repurchase agreements which do not
provide for payment within seven days, provided that the Fund
will not invest more than 5% of its total assets in
restricted securities and not more than 5% in securities of
unseasoned issuers. Securities eligible for resale under
Rule 144A of the Securities Act of 1933 are not included in
the 5% limitation but are subject to the 15% limitation;
(4) Investment Companies. Purchase securities of open-end or
closed-end investment companies except in compliance with the
Investment Company Act of 1940 and applicable state law.
Duplicate fees may result from such purchases;
(5) Mortgaging. Mortgage, pledge, hypothecate or, in any manner,
transfer any security owned by the Fund as security for
indebtedness except (i) as may be necessary in connection
with permissible borrowings or investments and then such
mortgaging, pledging or hypothecating may not exceed 30% of
the Fund's total assets valued at market at the time of the
borrowing or investment and (ii) it may enter into futures
contracts;
(6) Oil and Gas Programs. Purchase participations or other
direct interests or enter into leases with respect to, oil,
gas, other mineral exploration or development programs;
(7) Options, Etc. Invest in puts, calls, straddles, spreads, or
any combination thereof, except that the Fund may invest in
or commit its assets to purchasing and selling call and put
options to the extent permitted by the prospectus and
Statement of Additional Information;
PAGE 20
(8) Ownership of Portfolio Securities by Officers and Directors.
Purchase or retain the securities of any issuer if, to the
knowledge of the Fund's management, those officers and
directors of the Fund, and of its investment manager, who
each owns beneficially more than .5% of the outstanding
securities of such issuer, together own beneficially more
than 5% of such securities;
(9) Short Sales. Effect short sales of securities;
(10) Unseasoned Issuers. Purchase a security (other than
obligations issued or guaranteed by the U.S. Government or
any foreign government, their agencies or instrumentalities)
if, as a result, more than 5% of the value of the Fund's
total assets would be invested in the securities of issuers
which at the time of purchase had been in operation for less
than three years (for this purpose, the period of operation
of any issuer shall include the period of operation of any
predecessor or unconditional guarantor of such issuer); or
(11) Warrants. Invest in warrants, except that the Fund may
invest, hold, or sell warrants or other rights ("warrants")
where the grantor of the warrants is the issuer of the
underlying securities, provided that the Fund will not
purchase a warrant if, as a result thereof, more than 2% of
the value of the total assets of the Fund would be invested
in warrants which are not listed on the New York Stock
Exchange, the American Stock Exchange, or a recognized
foreign exchange, or more than 5% of the value of the total
assets of the Fund would be invested in warrants whether or
not so listed. For purposes of these percentage limitations,
the warrants will be valued at the lower of cost or market.
Notwithstanding anything in the above fundamental and operating
restrictions to the contrary, the Fund may invest all of its assets in a
single investment company or a series thereof in connection with a "master-
feeder" arrangement. Such an investment would be made where the Fund (a
"Feeder"), and one or more other Funds with the same investment objective and
program as the Fund, sought to accomplish its investment objective and program
by investing all of its assets in the shares of another investment company
(the "Master"). The Master would, in turn, have the same investment objective
and program as the Fund. The Fund would invest in this manner in an effort to
achieve the economies of scale associated with having a Master fund make
investments in portfolio companies on behalf of a number of Feeder funds.
Under the 1940 Act, the Fund may not invest in any securities of any
issuer which, in its most recent fiscal year, derived more than 15% of its
gross revenues from "securities related activities," as defined by rules of
the 1940 Act, unless certain conditions are met. As a result of these
restrictions, the Fund may not invest in the securities of certain banks,
broker-dealers and other companies in foreign countries. If the Fund finds
that this restriction prevents it from pursuing its investment objectives, it
may apply to the Securities and Exchange Commission for an order which would
permit it to acquire such securities, but no assurance can be given that any
such order will be granted. It is also possible the law in this area will
change, in which case the Fund could have greater flexibility in the purchase
of the securities of foreign banks, broker-dealers, and other companies.
Redemptions in Kind
In the unlikely event a shareholder were to receive an in kind
redemption of portfolio securities of the Fund, brokerage fees could be
incurred by the shareholder in a subsequent sale of such securities.
Issuance of Fund Shares for Securities
Transactions involving issuance of a fund's shares for securities or
assets other than cash will be limited to (1) bona fide reorganizations; (2)
statutory mergers; or (3) other acquisitions of portfolio securities that: (a)
meet the investment objectives and policies of the Fund; (b) are acquired for
investment and not for resale except in accordance with applicable law; (c)
have a value that is readily ascertainable via listing on or trading in a
recognized United States or international exchange or market; and (d) are not
illiquid.
PAGE 21
MANAGEMENT OF FUND
The officers and directors of the Fund are listed below. Unless
otherwise noted, the address of each is 100 East Pratt Street, Baltimore,
Maryland 21202. Except as indicated, each has been an employee of T. Rowe
Price for more than five years. In the list below, the Fund's directors who
are considered "interested persons" of T. Rowe Price or the Fund as defined
under Section 2(a)(19) of the Investment Company Act of 1940 are noted with an
asterisk (*). These directors are referred to as inside directors by virtue
of their officership, directorship, and/or employment with T. Rowe Price.
THOMAS H. BROADUS, JR., President and Director--Managing Director, T. Rowe
Price; Chartered Financial Analyst and Chartered Investment Counselor
LEO C. BAILEY, Retired; Address: 3396 South Placita Fabula, Green Valley,
Arizona 85614
DONALD W. DICK, JR., Director--Partner, Overseas Partners, Inc., a financial
investment firm; formerly (6/65-3/89) Director and Vice President-Consumer
Products Division, McCormick & Company, Inc., international food
processors; Director, Waverly Press, Inc., Baltimore, Maryland; Address:
375 Park Avenue, Suite 3505, New York, New York 10152
DAVID K. FAGIN, Director--Chairman, Chief Executive Officer and Director,
Golden Star Resources, Ltd.; formerly (1986-7/91) President, Chief
Operating Officer and Director, Homestake Mining Company; Address: One
Norwest Center, 1700 Lincoln Street, Suite 1950, Denver, Colorado 80203
ADDISON LANIER, Director--Financial management; President and Director, Thomas
Emery's Sons, Inc., and Emery Group, Inc.; Director, Scinet Development and
Holdings, Inc.; Address: 441 Vine Street, #2310, Cincinnati, Ohio 45202-
2913
JOHN K. MAJOR, Director--Chairman of the Board and President, KCMA
Incorporated, Tulsa, Oklahoma; Address: 126 E. 26 Place, Tulsa, Oklahoma
74114-2422
*JAMES S. RIEPE, Vice President and Director--Managing Director, T. Rowe
Price; Chairman of the Board, T. Rowe Price Services, Inc., T. Rowe Price
Retirement Plan Services, Inc., and T. Rowe Price Trust Company; President
and Director, T. Rowe Price Investment Services, Inc; Director, Rhone-
Paulenc Rorer, Inc.
*M. DAVID TESTA, Director--Managing Director, T. Rowe Price; Chairman of the
Board, Rowe Price-Fleming International, Inc.; Vice President and Director,
T. Rowe Price Trust Company; Chartered Financial Analyst
HUBERT D. VOS, Director--President, Stonington Capital Corporation, a private
investment company; Address: 1231 State Street, Suite 210, Santa Barbara,
CA 93190-0409
PAUL M. WYTHES, Director--Founding General Partner, Sutter Hill Ventures, a
venture capital limited partnership providing equity capital to young high
technology companies throughout the United States; Director, Teltone
Corporation, Interventional Technologies Inc., and Stuart Medical, Inc.;
Address: 755 Page Mill Road, Suite A200, Palo Alto, California 94304
HENRY H. HOPKINS, Vice President--Managing Director, T. Rowe Price; Vice
President and Director, T. Rowe Price Investment Services, Inc., T. Rowe
Price Services, Inc., and T. Rowe Price Trust Company; Vice President, Rowe
Price-Fleming International, Inc. and T. Rowe Price Retirement Plan
Services, Inc.
LARRY J. PUGLIA, Vice President--Vice President, T. Rowe Price
LENORA V. HORNUNG, Secretary--Vice President, T. Rowe Price
CARMEN F. DEYESU, Treasurer--Vice President, T. Rowe Price, T. Rowe Price
Services, Inc., and T. Rowe Price Trust Company
DAVID S. MIDDLETON, Controller--Vice President, T. Rowe Price, T. Rowe Price
Services, Inc. and T. Rowe Price Trust Company
ROGER L. FIERY, Assistant Vice President--Vice President, Rowe Price-Fleming
International, Inc.
EDWARD T. SCHNEIDER, Assistant Vice President--Vice President, T. Rowe Price
Services, Inc.
INGRID I. VORDEMBERGE, Assistant Vice President--Employee, T. Rowe Price
The Fund's Executive Committee, comprised of Messrs. Broadus, Riepe and
Testa, has been authorized by the Board of Directors to exercise all of the
powers of the Board to manage the Fund in the intervals between meetings of
the Board, except the powers prohibited by statute from being delegated.
PAGE 22
PRINCIPAL HOLDERS OF SECURITIES
As of the date of the prospectus, the officers and directors of the Fund,
as a group, owned less than 1% of the outstanding shares of the Fund.
INVESTMENT MANAGEMENT SERVICES
Services
Under the Management Agreement, T. Rowe Price provides the Fund with
discretionary investment services. Specifically, T. Rowe Price is responsible
for supervising and directing the investments of the Fund in accordance with
the Fund's investment objectives, program, and restrictions as provided in its
prospectus and this Statement of Additional Information. T. Rowe Price is
also responsible for effecting all security transactions on behalf of the
Fund, including the negotiation of commissions and the allocation of principal
business and portfolio brokerage. In addition to these services, T. Rowe
Price provides the Fund with certain corporate administrative services,
including: maintaining the Fund's corporate existence and corporate records;
registering and qualifying Fund shares under federal and state laws;
monitoring the financial, accounting, and administrative functions of the
Fund; maintaining liaison with the agents employed by the Fund such as the
Fund's custodian and transfer agent; assisting the Fund in the coordination of
such agents' activities; and permitting T. Rowe Price's employees to serve as
officers, directors, and committee members of the Fund without cost to the
Fund.
The Management Agreement also provides that T. Rowe Price, its directors,
officers, employees, and certain other persons performing specific functions
for the Fund will only be liable to the Fund for losses resulting from willful
misfeasance, bad faith, gross negligence, or reckless disregard of duty.
Management Fee
The Fund pays T. Rowe Price a fee ("Fee") which consists of two
components: a Group Management Fee ("Group Fee") and an Individual Fund Fee
("Fund Fee"). The Fee is paid monthly to T. Rowe Price on the first business
day of the next succeeding calendar month and is calculated as described
below.
The monthly Group Fee ("Monthly Group Fee") is the sum of the daily Group
Fee accruals ("Daily Group Fee Accruals") for each month. The Daily Group Fee
Accrual for any particular day is computed by multiplying the Price Funds'
group fee accrual as determined below ("Daily Price Funds' Group Fee Accrual")
by the ratio of the Fund's net assets for that day to the sum of the aggregate
net assets of the Price Funds for that day. The Daily Price Funds' Group Fee
Accrual for any particular day is calculated by multiplying the fraction of
one (1) over the number of calendar days in the year by the annualized Daily
Price Funds' Group Fee Accrual for that day as determined in accordance with
the following schedule:
Price Funds'
Annual Group Base Fee
Rate for Each Level of Assets
0.480% First $1 billion
0.450% Next $1 billion
0.420% Next $1 billion
0.390% Next $1 billion
0.370% Next $1 billion
0.360% Next $2 billion
0.350% Next $2 billion
0.340% Next $5 billion
0.330% Next $10 billion
0.320% Next $10 billion
0.310% Thereafter
PAGE 23
For the purpose of calculating the Group Fee, the Price Funds include all
the mutual funds distributed by T. Rowe Price Investment Services, Inc.,
(excluding T. Rowe Price Spectrum Fund, Inc. and any institutional or private
label mutual funds). For the purpose of calculating the Daily Price Funds'
Group Fee Accrual for any particular day, the net assets of each Price Fund
are determined in accordance with the Fund's prospectus as of the close of
business on the previous business day on which the Fund was open for business.
The monthly Fund Fee ("Monthly Fund Fee") is the sum of the daily Fund
Fee accruals ("Daily Fund Fee Accruals") for each month. The Daily Fund Fee
Accrual for any particular day is computed by multiplying the fraction of one
(1) over the number of calendar days in the year by the individual Fund Fee
Rate of 0.30% and multiplying this product by the net assets of the Fund for
that day, as determined in accordance with the Fund's prospectus as of the
close of business on the previous business day on which the Fund was open for
business.
Limitation on Fund Expenses
The Management Agreement between the Fund and T. Rowe Price provides that
the Fund will bear all expenses of its operations not specifically assumed by
T. Rowe Price. However, in compliance with certain state regulations, T. Rowe
Price will reimburse the Fund for certain expenses which in any year exceed
the limits prescribed by any state in which the Fund's shares are qualified
for sale. Presently, the most restrictive expense ratio limitation imposed by
any state is 2.5% of the first $30 million of the Fund's average daily net
assets, 2% of the next $70 million of the Fund's assets, and 1.5% of net
assets in excess of $100 million. Reimbursement by the Fund to T. Rowe Price
of any expenses paid or assumed under a state expense limitation may not be
made more than two years after the end of the fiscal year in which the
expenses were paid or assumed.
In the interest of limiting the expenses of the Fund during its initial
period of operations, T. Rowe Price agreed to bear any expenses through
December 31, 1994, which would cause the Fund's ratio of expenses to average
net assets to exceed 1.25%. Expenses paid or assumed under this agreement are
subject to reimbursement to T. Rowe Price by the Fund whenever the Fund's
expense ratio is below 1.25%; however, no reimbursement will be made after
December 31, 1996, or if it would result in the expense ratio exceeding 1.25%.
The Management Agreement also provides that one or more additional expense
limitation periods (of the same or different levels and time periods) may be
implemented after the expiration of the current one on December 31, 1994, and
that with respect to any such additional limitation period, the Fund may
reimburse T. Rowe Price, provided the reimbursement does not result in the
Fund's aggregate expenses exceeding the additional expense limitation.
DISTRIBUTOR FOR FUND
T. Rowe Price Investment Services, Inc. ("Investment Services"), a
Maryland corporation formed in 1980 as a wholly-owned subsidiary of T. Rowe
Price, serves as the Fund's distributor. Investment Services is registered as
a broker-dealer under the Securities Exchange Act of 1934 and is a member of
the National Association of Securities Dealers, Inc. The offering of the
Fund's shares is continuous.
Investment Services is located at the same address as the Fund and T.
Rowe Price -- 100 East Pratt Street, Baltimore, Maryland 21202.
Investment Services serves as distributor to the Fund pursuant to an
Underwriting Agreement ("Underwriting Agreement"), which provides that the
Fund will pay all fees and expenses in connection with: registering and
qualifying its shares under the various state "blue sky" laws; preparing,
setting in type, printing, and mailing its prospectuses and reports to
shareholders; and issuing its shares, including expenses of confirming
purchase orders.
PAGE 24
The Underwriting Agreement provides that Investment Services will pay all
fees and expenses in connection with: printing and distributing prospectuses
and reports for use in offering and selling Fund shares; preparing, setting in
type, printing, and mailing all sales literature and advertising; Investment
Services' federal and state registrations as a broker-dealer; and offering and
selling Fund shares, except for those fees and expenses specifically assumed
by the Fund. Investment Services' expenses are paid by T. Rowe Price.
Investment Services acts as the agent of the Fund in connection with the
sale of its shares in all states in which the shares are qualified and in
which Investment Services is qualified as a broker-dealer. Under the
Underwriting Agreement, Investment Services accepts orders for Fund shares at
net asset value. No sales charges are paid by investors or the Fund.
CUSTODIAN
State Street Bank and Trust Company (the "Bank") is the custodian for the
Fund's securities and cash, but it does not participate in the Fund's
investment decisions. Portfolio securities purchased in the U.S. are
maintained in the custody of the Bank and may be entered into the Federal
Reserve Book Entry System, or the security depository system of the Depository
Trust Corporation. The Bank and Fund have entered into a Sub-Custodian
Agreement with The Chase Manhattan Bank, N.A., London, pursuant to which
portfolio securities which are purchased outside the United States are
maintained in the custody of various foreign branches and affiliates of The
Chase Manhattan Bank and such other custodians, including foreign banks and
foreign securities depositories, in accordance with regulations under the
Investment Company Act of 1940. The Bank's main office is at 225 Franklin
Street, Boston, Massachusetts 02110. The address for The Chase Manhattan
Bank, N.A., London is Woolgate House, Coleman Street, London, EC2P 2HD,
England.
PORTFOLIO TRANSACTIONS
Investment or Brokerage Discretion
Decisions with respect to the purchase and sale of portfolio securities
on behalf of the Fund are made by T. Rowe Price. T. Rowe Price is also
responsible for implementing these decisions, including the negotiation of
commissions and the allocation of portfolio brokerage and principal business.
How Brokers and Dealers are Selected
Equity Securities
In purchasing and selling the Fund's portfolio securities, it is T. Rowe
Price's policy to obtain quality execution at the most favorable prices
through responsible brokers and dealers and, in the case of agency
transactions, at competitive commission rates. However, under certain
conditions, the Fund may pay higher brokerage commissions in return for
brokerage and research services. As a general practice, over-the-counter
orders are executed with market-makers. In selecting among market-makers, T.
Rowe Price generally seeks to select those it believes to be actively and
effectively trading the security being purchased or sold. In selecting
broker-dealers to execute the Fund's portfolio transactions, consideration is
given to such factors as the price of the security, the rate of the
commission, the size and difficulty of the order, the reliability, integrity,
financial condition, general execution and operational capabilities of
competing brokers and dealers, and brokerage and research services provided by
them. It is not the policy of T. Rowe Price to seek the lowest available
commission rate where it is believed that a broker or dealer charging a higher
commission rate would offer greater reliability or provide better price or
execution.
PAGE 25
Fixed Income Securities
Fixed income securities are generally purchased from the issuer or a
primary market-maker acting as principal for the securities on a net basis,
with no brokerage commission being paid by the client. Transactions placed
through dealers serving as primary market-makers reflect the spread between
the bid and asked prices. Securities may also be purchased from underwriters
at prices which include underwriting fees.
With respect to equity and fixed income securities, T. Rowe Price may
effect principal transactions on behalf of the Fund with a broker or dealer
who furnishes brokerage and/or research services, designate any such broker or
dealer to receive selling concessions, discounts or other allowances, or
otherwise deal with any such broker or dealer in connection with the
acquisition of securities in underwritings.
How Evaluations are Made of the Overall Reasonableness of Brokerage
Commissions Paid
On a continuing basis, T. Rowe Price seeks to determine what levels of
commission rates are reasonable in the marketplace for transactions executed
on behalf of the Fund. In evaluating the reasonableness of commission rates,
T. Rowe Price considers: (a) historical commission rates, both before and
since rates have been fully negotiable; (b) rates which other institutional
investors are paying, based on available public information; (c) rates quoted
by brokers and dealers; (d) the size of a particular transaction, in terms of
the number of shares, dollar amount, and number of clients involved; (e) the
complexity of a particular transaction in terms of both execution and
settlement; (f) the level and type of business done with a particular firm
over a period of time; and (g) the extent to which the broker or dealer has
capital at risk in the transaction.
Description of Research Services Received from Brokers and Dealers
T. Rowe Price receives a wide range of research services from brokers
and dealers. These services include information on the economy, industries,
groups of securities, individual companies, statistical information,
accounting and tax law interpretations, political developments, legal
developments affecting portfolio securities, technical market action, pricing
and appraisal services, credit analysis, risk measurement analysis,
performance analysis and analysis of corporate responsibility issues. These
services provide both domestic and international perspective. Research
services are received primarily in the form of written reports, computer
generated services, telephone contacts and personal meetings with security
analysts. In addition, such services may be provided in the form of meetings
arranged with corporate and industry spokespersons, economists, academicians
and government representatives. In some cases, research services are
generated by third parties but are provided to T. Rowe Price by or through
broker-dealers.
Research services received from brokers and dealers are supplemental to
T. Rowe Price's own research effort and, when utilized, are subject to
internal analysis before being incorporated by T. Rowe Price into its
investment process. As a practical matter, it would not be possible for T.
Rowe Price's Equity Research Division to generate all of the information
presently provided by brokers and dealers. T. Rowe Price pays cash for
certain research services received from external sources. T. Rowe Price also
allocates brokerage for research services which are available for cash. While
receipt of research services from brokerage firms has not reduced T. Rowe
Price's normal research activities, the expenses of T. Rowe Price could be
materially increased if it attempted to generate such additional information
through its own staff. To the extent that research services of value are
provided by brokers or dealers, T. Rowe Price may be relieved of expenses
which it might otherwise bear.
T. Rowe Price has a policy of not allocating brokerage business in
return for products or services other than brokerage or research services. In
accordance with the provisions of Section 28(e) of the Securities Exchange Act
of 1934, T. Rowe Price may from time to time receive services and products
which serve both research and non-research functions. In such event, T. Rowe
Price makes a good faith determination of the anticipated research and non-
research use of the product or service and allocates brokerage only with
respect to the research component.
PAGE 26
Commissions to Brokers who Furnish Research Services
Certain brokers who provide quality execution services also furnish
research services to T. Rowe Price. In order to be assured of continuing to
receive research services considered of value to its clients, T. Rowe Price
has adopted a brokerage allocation policy embodying the concepts of Section
28(e) of the Securities Exchange Act of 1934, which permits an investment
adviser to cause an account to pay commission rates in excess of those another
broker or dealer would have charged for effecting the same transaction, if the
adviser determines in good faith that the commission paid is reasonable in
relation to the value of the brokerage and research services provided. The
determination may be viewed in terms of either the particular transaction
involved or the overall responsibilities of the adviser with respect to the
accounts over which it exercises investment discretion. Accordingly, while T.
Rowe Price cannot readily determine the extent to which commission rates or
net prices charged by broker-dealers reflect the value of their research
services, T. Rowe Price would expect to assess the reasonableness of
commissions in light of the total brokerage and research services provided by
each particular broker.
Internal Allocation Procedures
T. Rowe Price has a policy of not precommitting a specific amount of
business to any broker or dealer over any specific time period. Historically,
the majority of brokerage placement has been determined by the needs of a
specific transaction such as market-making, availability of a buyer or seller
of a particular security, or specialized execution skills. However, T. Rowe
Price does have an internal brokerage allocation procedure for that portion of
its discretionary client brokerage business where special needs do not exist,
or where the business may be allocated among several brokers which are able to
meet the needs of the transaction.
Each year, T. Rowe Price assesses the contribution of the brokerage and
research services provided by brokers, and attempts to allocate a portion of
its brokerage business in response to these assessments. Research analysts,
counselors, various investment committees, and the Trading Department each
seek to evaluate the brokerage and research services they receive from brokers
and make judgments as to the level of business which would recognize such
services. In addition, brokers sometimes suggest a level of business they
would like to receive in return for the various brokerage and research
services they provide. Actual brokerage received by any firm may be less than
the suggested allocations but can, and often does, exceed the suggestions,
because the total brokerage business is allocated on the basis of all the
considerations described above. In no case is a broker excluded from
receiving business from T. Rowe Price because it has not been identified as
providing research services.
Miscellaneous
T. Rowe Price's brokerage allocation policy is consistently applied to
all its fully discretionary accounts, which represent a substantial majority
of all assets under management. Research services furnished by brokers
through which T. Rowe Price effects securities transactions may be used in
servicing all accounts (including non-Fund accounts) managed by T. Rowe Price.
Conversely, research services received from brokers which execute transactions
for the Fund are not necessarily used by T. Rowe Price exclusively in
connection with the management of the Fund.
From time to time, orders for clients may be placed through a
computerized transaction network.
The Fund does not allocate business to any broker-dealer on the basis of
its sales of the Fund's shares. However, this does not mean that broker-
dealers who purchase Fund shares for their clients will not receive business
from the Fund.
Some of T. Rowe Price's other clients have investment objectives and
programs similar to those of the Fund. T. Rowe Price may occasionally make
recommendations to other clients which result in their purchasing or selling
securities simultaneously with the Fund. As a result, the demand for
securities being purchased or the supply of securities being sold may
increase, and this could have an adverse effect on the price of those
securities. It is T. Rowe Price's policy not to favor one client over another
in making
PAGE 27
recommendations or in placing orders. T. Rowe Price frequently follows the
practice of grouping orders of various clients for execution which generally
results in lower commission rates being attained. In certain cases, where the
aggregate order is executed in a series of transactions at various prices on a
given day, each participating client's proportionate share of such order
reflects the average price paid or received with respect to the total order.
T. Rowe Price has established a general investment policy that it will
ordinarily not make additional purchases of a common stock of a company for
its clients (including the T. Rowe Price Funds) if, as a result of such
purchases, 10% or more of the outstanding common stock of such company would
be held by its clients in the aggregate.
To the extent possible, T. Rowe Price intends to recapture solicitation
fees paid in connection with tender offers through T. Rowe Price Investment
Services, Inc., the Fund's distributor. At the present time, T. Rowe Price
does not recapture commissions or underwriting discounts or selling group
concessions in connection with taxable securities acquired in underwritten
offerings. T. Rowe Price does, however, attempt to negotiate elimination of
all or a portion of the selling-group concession or underwriting discount when
purchasing tax-exempt municipal securities on behalf of its clients in
underwritten offerings.
Transactions with Related Brokers and Dealers
As provided in the Investment Management Agreement between the Fund and
T. Rowe Price, T. Rowe Price is responsible not only for making decisions with
respect to the purchase and sale of the Fund's portfolio securities, but also
for implementing these decisions, including the negotiation of commissions and
the allocation of portfolio brokerage and principal business. It is expected
that T. Rowe Price may place orders for the Fund's portfolio transactions with
broker-dealers through the same trading desk T. Rowe Price uses for portfolio
transactions in domestic securities. The trading desk accesses brokers and
dealers in various markets in which the Fund's foreign securities are located.
These brokers and dealers may include certain affiliates of Robert Fleming
Holdings Limited ("Robert Fleming Holdings"), and Jardine Fleming Group
Limited ("JFG"), persons indirectly related to T. Rowe Price. Robert Fleming
Holdings, through Copthall Overseas Limited, a wholly-owned subsidiary, owns
25% of the common stock of Rowe Price-Fleming International, Inc. ("RPFI"), an
investment adviser registered under the Investment Advisers Act of 1940.
Fifty percent of the common stock of RPFI is owned by TRP Finance, Inc., a
wholly-owned subsidiary of T. Rowe Price, and the remaining 25% is owned by
Jardine Fleming Holdings Limited, a subsidiary of JFG. JFG is 50% owned by
Robert Fleming Holdings and 50% owned by Jardine Matheson Holdings Limited.
Orders for the Fund's portfolio transactions placed with affiliates of Robert
Fleming Holdings and JFG will result in commissions being received by such
affiliates.
The Board of Directors of the Fund has authorized T. Rowe Price to
utilize certain affiliates of Robert Fleming and JFG in the capacity of broker
in connection with the execution of the Fund's portfolio transactions. These
affiliates include, but are not limited to, Jardine Fleming Securities Limited
("JFS"), a wholly-owned subsidiary of JFG, Robert Fleming & Co. Limited
("RF&Co."), Jardine Fleming Australia Securities Limited, and Robert Fleming,
Inc. (a New York brokerage firm). Other affiliates of Robert Fleming Holdings
and JFG also may be used. Although it does not believe that the Fund's use of
these brokers would be subject to Section 17(e) of the Investment Company Act
of 1940, the Board of Directors of the Fund has agreed that the procedures set
forth in Rule 17(e)(1) under that Act will be followed when using such
brokers.
PRICING OF SECURITIES
Equity securities listed or regularly traded on a securities exchange
(including NASDAQ) are valued at the last quoted sales price on the day the
valuations are made. A security which is listed or traded on more than one
exchange is valued at the quotation on the exchange determined to be the
primary market for such security. Other equity securities and those listed
securities that are not traded on a particular day are valued at a price
within the limits of the latest bid and asked prices deemed by the Board of
Directors, or by persons delegated by the Board, best to reflect fair value.
PAGE 28
Debt securities are generally traded in the over-the-counter market and
are valued at a price deemed best to reflect fair value as quoted by dealers
who make markets in these securities or by an independent pricing service.
Short-term debt securities are valued at their cost in local currency which,
when combined with accrued interest, approximates fair value.
For purposes of determining the Fund's net asset value per share, all
assets and liabilities initially expressed in foreign currencies are converted
into U.S. dollars at the mean of the bid and offer prices of such currencies
against U.S. dollars quoted by a major bank.
Assets and liabilities for which the above valuation procedures are
inappropriate or are deemed not to reflect fair value are stated at fair value
as determined in good faith by or under the supervision of the officers of the
Fund, as authorized by the Board of Directors.
NET ASSET VALUE PER SHARE
The purchase and redemption price of the Fund's shares is equal to the
Fund's net asset value per share or share price. The Fund determines its net
asset value per share by subtracting its liabilities (including accrued
expenses and dividends payable) from its total assets (the market value of the
securities the Fund holds plus cash and other assets, including income accrued
but not yet received) and dividing the result by the total number of shares
outstanding. The net asset value per share of the Fund is calculated as of
the close of trading on the New York Stock Exchange ("NYSE") every day the
NYSE is open for trading. The NYSE is closed on the following days: New
Year's Day, Washington's Birthday, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day, and Christmas Day.
Determination of net asset value (and the offering, sale, redemption and
repurchase of shares) for the Fund may be suspended at times (a) during which
the NYSE is closed, other than customary weekend and holiday closings, (b)
during which trading on the NYSE is restricted (c) during which an emergency
exists as a result of which disposal by the Fund of securities owned by it is
not reasonably practicable or it is not reasonably practicable for the Fund
fairly to determine the value of its net assets, or (d) during which a
governmental body having jurisdiction over the Fund may by order permit such a
suspension for the protection of the Fund's shareholders; provided that
applicable rules and regulations of the Securities and Exchange Commission (or
any succeeding governmental authority) shall govern as to whether the
conditions prescribed in (b), (c) or (d) exist.
DIVIDENDS
Unless you elect otherwise, dividends and capital gain distributions
will be reinvested on the reinvestment date using the NAV per share of that
date. The reinvestment date normally precedes the payment date by about 10
days although the exact timing is subject to change.
TAX STATUS
The Fund intends to qualify as a "regulated investment company" under
Subchapter M of the Internal Revenue Code of 1986, as amended ("Code").
A portion of the dividends paid by the Fund may be eligible for the
dividends-received deduction for corporate shareholders. For tax purposes, it
does not make any difference whether dividends and capital gain distributions
are paid in cash or in additional shares. The Fund must declare dividends
equal to at least 98% of ordinary income (as of December 31) and capital
gains (as of October 31) in order to avoid a federal excise tax and distribute
100% of ordinary income and capital gains as of December 31 to avoid federal
income tax.
PAGE 29
At the time of your purchase, the Fund's net asset value may reflect
undistributed income, capital gains or net unrealized appreciation of
securities held by the Fund. A subsequent distribution to you of such
amounts, although constituting a return of your investment, would be taxable
as either dividends or capital gain distributions. For federal income tax
purposes, the Fund is permitted to carry forward its net realized capital
losses, if any, for eight years, and realize net capital gains up to the
amount of such losses without being required to pay taxes on, or distribute
such gains.
If, in any taxable year, the Fund should not qualify as a regulated
investment company under the Code: (i) the Fund would be taxable at the
normal corporate rates on the entire amount of its taxable income, if any,
without deduction for dividends or other distributions to shareholders and
(ii) the Fund's distributions to the extent made out of the Fund's current or
accumulated earnings and profits would be taxable to shareholders as ordinary
dividends (regardless of whether they would otherwise have been considered
capital gain dividends).
Taxation of Foreign Shareholders
The Code provides that dividends from net income will be subject to U.S.
tax. For shareholders who are not engaged in a business in the U.S., this tax
would be imposed at the rate of 30% upon the gross amount of the dividends in
the absence of a Tax Treaty providing for a reduced rate or exemption from
U.S. taxation. Distributions of net long-term capital gains realized by the
Fund are not subject to tax unless the foreign shareholder is a nonresident
alien individual who was physically present in the U.S. during the tax year
for more than 182 days.
To the extent the Fund invests in foreign securities, the following
would apply:
Foreign Currency Gains and Losses
Foreign currency gains and losses, including the portion of gain or loss
on the sale of debt securities attributable to foreign exchange rate
fluctuations, are taxable as ordinary income. If the net effect of these
transactions is a gain, the dividend paid by the Fund will be increased; if
the result is a loss, the income dividend paid by the Fund will be decreased.
Adjustments to reflect these gains and losses will be made at the end of the
Fund's taxable year.
Passive Foreign Investment Companies (PFICs)
The Fund may purchase the securities of certain foreign investment funds
or trusts called passive foreign investment companies. Capital gains on the
sale of such holdings will be deemed to be ordinary income regardless of how
long the Fund holds its investment. In addition to bearing their
proportionate share of the fund's expenses (management fees and operating
expenses) shareholders will also indirectly bear similar expenses of such
funds. In addition, the Fund may be subject to corporate income tax and an
interest charge on certain dividends and capital gains earned from these
investments, regardless of whether such income and gains were distributed to
shareholders.
In accordance with tax regulations, the Fund treats these securities as
sold on the last day of the Fund's fiscal year and recognizes any gains for
tax purposes at that time thereby avoiding corporate income tax and/or an
interest charge; losses will not be recognized. Such gains will be considered
ordinary income which the Fund will be required to distribute even though it
has not sold the security and received cash to pay such distributions.
INVESTMENT PERFORMANCE
Total Return Performance
The Fund's calculation of total return performance includes the
reinvestment of all capital gain distributions and income dividends for the
period or periods indicated, without regard to tax consequences
PAGE 30
to a shareholder in the Fund. Total return is calculated as the percentage
change between the beginning value of a static account in the Fund and the
ending value of that account measured by the then current net asset value,
including all shares acquired through reinvestment of income and capital gains
dividends. The results shown are historical and should not be considered
indicative of the future performance of the Fund. Each average annual
compound rate of return is derived from the cumulative performance of the Fund
over the time period specified. The annual compound rate of return for the
Fund over any other period of time will vary from the average.
From time to time, in reports and promotions literature: (1) the Fund's
total return performance or P/E ratio may be compared with any one or a
combination of the following: (i) the Standard & Poor's 500 Stock Index so
that you may compare the Fund's results with those of a group of unmanaged
securities widely regarded by investors as representative of the stock market
in general; (ii) other groups of mutual funds, including T. Rowe Price Funds,
tracked by: (A) Lipper Analytical Services, a widely used independent
research firm which ranks mutual funds by overall performance, investment
objectives, and assets; (B) Morningstar, Inc., another widely used independent
research firm which rates mutual funds; or (C) other financial or business
publications, such as Business Week, Money Magazine, Forbes and Barron's,
which provide similar information; (iii) indices of stocks comparable to those
in which the Fund invests; (2) the Consumer Price Index (measure for
inflation) may be used to assess the real rate of return from an investment in
the Fund; (3) other government statistics such as GNP, and net import and
export figures derived from governmental publications, e.g. The Survey of
Current Business, may be used to illustrate investment attributes of the Fund
or the general economic, business, investment, or financial environment in
which the Fund operates; (4) the effect of tax-deferred compounding on the
Fund's investment returns, or on returns in general, may be illustrated by
graphs, charts, etc. where such graphs or charts would compare, at various
points in time, the return from an investment in the Fund (or returns in
general) on a tax-deferred basis (assuming reinvestment of capital gains and
dividends and assuming one or more tax rates) with the return on a taxable
basis; and (5) the sectors or industries in which the Fund invests may be
compared to relevant indices or surveys (e.g. S&P Industry Surveys) in order
to evaluate the Fund's historical performance or current or potential value
with respect to the particular industry or sector. In connection with (4)
above, information derived from the following chart may be used:
IRA Versus Taxable Return
Assuming 9% annual rate of return, $2,000 annual contribution and 28% tax
bracket.
Year Taxable Tax Deferred
10 $28,700 $33,100
15 51,400 64,000
20 82,500 111,500
25 125,100 184,600
30 183,300 297,200
IRAs
An IRA is a long-term investment whose objective is to accumulate
personal savings for retirement. Due to the long-term nature of the
investment, even slight differences in performance will result in
significantly different assets at retirement. Mutual funds, with their
diversity of choice, can be used for IRA investments. Generally, individuals
may need to adjust their underlying IRA investments as their time to
retirement and tolerance for risk changes.
Other Features and Benefits
The Fund is a member of the T. Rowe Price Family of Funds and may help
investors achieve various long-term investment goals, such as investing money
for retirement, saving for a down payment on a home, or paying college costs.
To explain how the Fund could be used to assist investors in planning for
these goals and to illustrate basic principles of investing, various
worksheets and guides prepared by T. Rowe Price
PAGE 31
Associates, Inc. and/or T. Rowe Price Investment Services, Inc. may be made
available. These currently include: the Asset Mix Worksheet which is designed
to show shareholders how to reduce their investment risk by developing a
diversified investment plan; the College Planning Guide which discusses
various aspects of financial planning to meet college expenses and assists
parents in projecting the costs of a college education for their children; the
Retirement Planning Kit (also available in a PC version) which includes a
detailed workbook to determine how much money you may need for retirement and
suggests how you might invest to reach your goal; and the Retirees Financial
Guide which includes a detailed workbook to determine how much money you can
afford to spend and still preserve your purchasing power and suggests how you
might invest to reach your goal. From time to time, other worksheets and
guides may be made available as well. Of course, an investment in the Fund
cannot guarantee that such goals will be met.
To assist investors in understanding the different returns and risk
characteristics of various investments, the aforementioned guides will include
presentation of historical returns of various investments using published
indices. An example of this is shown below.
Historical Returns for Different Investments
Annualized returns for periods ended 12/31/92
50 years 25 years 10 years 5 years
Small-Company Stocks 16.3% 12.4% 11.6% 13.6%
Large-Company Stocks 12.6 10.6 16.2 15.9
Foreign Stocks N/A N/A 17.1 1.6
Long-Term Corporate Bonds 5.4 8.8 13.1 12.5
Intermediate-Term U.S.
Gov't. Bonds 5.6 9.0 11.0 10.3
Treasury Bills 4.6 7.2 6.9 6.3
U.S. Inflation 4.3 5.9 3.8 4.2
Sources: Ibbotson Associates. Foreign stocks reflect performance of The
Morgan Stanley Capital International EAFE Index, which includes some 1,000
companies representing the stock markets of Europe, Australia, New Zealand,
and the Far East. This chart is for illustrative purposes only and should not
be considered as performance for any T. Rowe Price Fund. Past performance
does not guarantee future results.
Also included will be various portfolios demonstrating how these
historical indices would have performed in various combinations over a
specified time period in terms of return. An example of this is shown below.
PAGE 32
Performance of Retirement Portfolios*
Asset Mix Annualized Returns Number Value
20 Years Ending of Years of
12/31/92 with $10,000
Negative Investment
Returns After Period
_____________________ _______________________ ________ __________
Best Worst
Portfolio Growth Income Safety Average Year Year
I. Low
Risk 15% 35% 50% +9.0% +19.0% -0.2% 1 $ 56,451
II. Moderate
Risk 55% 30% 15% +10.4% +25.7% - 7.5% 2 $ 72,918
III. High
Risk 85% 15% 0% +11.2% +34.5% -16.2% 5 $ 83,382
Source: T. Rowe Price Associates; data supplied by Ibbotson Associates.
* Based on actual performance of stocks (Wilshire 5000), Lehman Brothers
Government/Corporate Bond Index, and Treasury bills from January 1973
through December 1992. Past performance does not guarantee future
results. Figures include changes in principal value and reinvested
dividends. This Exhibit is for illustrative purposes only and is not
representative of the performance of any T. Rowe Price Fund.
From time to time, Insights, a T. Rowe Price publication of reports on
specific investment topics and strategies, may be included in the Fund's
fulfillment kit. Such reports may include information concerning:
calculating taxable gains and losses on mutual fund transactions, coping with
stock market volatility, benefiting from dollar cost averaging, understanding
international markets, investing in high-yield "junk" bonds, growth stock
investing, conservative stock investing, value investing, investing in small
companies, tax-free investing, fixed income investing, investing in mortgage-
backed securities, as well as other topics and strategies.
CAPITAL STOCK
The Fund's Charter authorizes the Board of Directors to classify and
reclassify any and all shares which are then unissued, including unissued
shares of capital stock into any number of classes or series, each class or
series consisting of such number of shares and having such designations, such
powers, preferences, rights, qualifications, limitations, and restrictions, as
shall be determined by the Board subject to the Investment Company Act and
other applicable law. The shares of any such additional classes or series
might therefore differ from the shares of the present class and series of
capital stock and from each other as to preferences, conversions or other
rights, voting powers, restrictions, limitations as to dividends,
qualifications or terms or conditions of redemption, subject to applicable
law, and might thus be superior or inferior to the capital stock or to other
classes or series in various characteristics. The Board of Directors may
increase or decrease the aggregate number of shares of stock or the number of
shares of stock of any class or series that the Fund has authorized to issue
without shareholder approval.
Except to the extent that the Fund's Board of Directors might provide by
resolution that holders of shares of a particular class are entitled to vote
as a class on specified matters presented for a vote of the holders of all
shares entitled to vote on such matters, there would be no right of class vote
unless and to the extent that such a right might be construed to exist under
Maryland law. The Charter contains no
PAGE 33
provision entitling the holders of the present class of capital stock to a
vote as a class on any matter. Accordingly, the preferences, rights, and other
characteristics attaching to any class of shares, including the present class
of capital stock, might be altered or eliminated, or the class might be
combined with another class or classes, by action approved by the vote of the
holders of a majority of all the shares of all classes entitled to be voted on
the proposal, without any additional right to vote as a class by the holders
of the capital stock or of another affected class or classes.
Shareholders are entitled to one vote for each full share held (and
fractional votes for fractional shares held) and will vote in the election of
or removal of directors (to the extent hereinafter provided) and on other
matters submitted to the vote of shareholders. There will normally be no
meetings of shareholders for the purpose of electing directors unless and
until such time as less than a majority of the directors holding office have
been elected by shareholders, at which time the directors then in office will
call a shareholders' meeting for the election of directors. Except as set
forth above, the directors shall continue to hold office and may appoint
successor directors. Voting rights are not cumulative, so that the holders of
more than 50% of the shares voting in the election of directors can, if they
choose to do so, elect all the directors of the Fund, in which event the
holders of the remaining shares will be unable to elect any person as a
director. As set forth in the By-Laws of the Fund, a special meeting of
shareholders of the Fund shall be called by the Secretary of the Fund on the
written request of shareholders entitled to cast at least 10% of all the votes
of the Fund entitled to be cast at such meeting. Shareholders requesting such
a meeting must pay to the Fund the reasonably estimated costs of preparing and
mailing the notice of the meeting. The Fund, however, will otherwise assist
the shareholders seeking to hold the special meeting in communicating to the
other shareholders of the Fund to the extent required by Section 16(c) of the
Investment Company Act of 1940.
FEDERAL AND STATE REGISTRATION OF SHARES
The Fund's shares are registered for sale under the Securities Act of
1933, and the Fund or its shares are registered under the laws of all states
which require registration, as well as the District of Columbia and Puerto
Rico.
LEGAL COUNSEL
Shereff, Friedman, Hoffman, & Goodman, whose address is 919 Third Avenue,
New York, New York 10022, is legal counsel to the Fund.
INDEPENDENT ACCOUNTANTS
Price Waterhouse, 7 St. Paul Street, Suite 1700, Baltimore, Maryland
21202, are independent accountants to the Fund. The Statement of Assets and
Liabilities of the Fund as of June 25, 1993, included in the Statement of
Additional Information has been so included in reliance on the report of Price
Waterhouse, given on the authority of said firm as experts in auditing and
accounting.
The financial statements of the Blue Chip Growth Fund for the period June
30, 1993 (commencement of operations) to December 31, 1993, are included in
the Fund's Annual Report on pages 6 through 14. A copy of the Annual Report
accompanies this Statement of Additional Information. The following financial
statements and the report of independent accountants appearing in the Annual
Report for the period ended December 31, 1993, are incorporated into this
Statement of Additional Information by reference:
PAGE 34
Annual
Report Page
Report of Independent Accountants 14
Statement of Net Assets, December 31, 1993 6-8
Statement of Operations, June 30, 1993 9
(Commencement of Operations) to
December 31, 1993
Statement of Changes in Net Assets, June 30, 10
1993 (Commencement of Operations) to
December 31, 1993
Notes to Financial Statements, December 31, 1993 11-12
Financial Highlights, June 30, 1993 13
(Commencement of Operations) to December 31, 1993
