PAGE 1
Prospectus for the T. Rowe Price Summit Municipal Funds, Inc.,
dated March 1, 1995, should be inserted here.
TO OPEN AN ACCOUNT
INVESTOR SERVICES
1-800-977-1577
FOR YIELDS & PRICES
TELE*ACCESS(REGISTERED TRADEMARK)
1-800-638-2587
24 HOURS, 7 DAYS
INVESTOR CENTERS
101 EAST LOMBARD ST.
BALTIMORE, MD
T. ROWE PRICE
FINANCIAL CENTER
10090 RED RUN BLVD.
OWINGS MILLS, MD
FARRAGUT SQUARE
900 17TH STREET, N.W.
WASHINGTON, DC
ARCO TOWER
31ST FLOOR
515 SOUTH FLOWER ST.
LOS ANGELES, CA
SMC
INVEST WITH CONFIDENCE
TO HELP YOU ACHIEVE YOUR FINANCIAL GOALS, T. ROWE PRICE OFFERS A WIDE RANGE OF
STOCK, BOND, AND MONEY MARKET INVESTMENTS, AS WELL AS CONVENIENT SERVICES AND
TIMELY, INFORMATIVE REPORTS.
Prospectus
T. Rowe Price
Summit Municipal Funds
T. Rowe Price
Summit Municipal Funds, Inc.
March 1, 1995
__________________________________________________________________________
A choice of municipal bond and money market funds for investors seeking
tax-exempt income.
Facts at a Glance
Objectives
Money fund: Preservation of capital, liquidity, and the highest level of
income consistent with these goals.
Bond funds: Highest level of income consistent with each fund's prescribed
investment program.
As with all mutual funds, these funds may not meet their objectives.
Strategy and Risk/Reward
Municipal Money Market Fund. Invests exclusively in high-quality municipal
securities whose income is exempt from federal income taxes. Average maturity
will not exceed 90 days. YOUR INVESTMENT IN THE FUND IS NEITHER INSURED NOR
GUARANTEED BY THE U.S. GOVERNMENT AND THERE IS NO ASSURANCE THE FUND WILL BE
ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
Risk/Reward: Lowest potential risk and reward.
Municipal Intermediate Fund. Invests primarily in investment-grade municipal
bonds whose income is exempt from federal income taxes. Average effective
maturity will range between five and 10 years.
Risk/Reward: Higher income than the Municipal Money Fund with less potential
share-price fluctuation than the Municipal Income Fund.
Municipal Income Fund. Invests primarily in long-term investment-grade
municipal bonds whose income is exempt from federal income taxes. Average
maturity will be 10 years or longer.
Risk/Reward: Higher income than the Municipal Intermediate Fund but also
greater potential price fluctuation.
Investor Profile. Investors who can benefit from tax-exempt income because of
their tax bracket and can also meet the $25,000 initial purchase requirement.
A major portion of each fund's income will have to be included in the
alternative minimum tax computation; however, relatively few taxpayers are
required to pay this tax. Not appropriate for tax-deferred retirement plans.
Fees and Charges. 100% no load. No fees or charges to buy or sell shares or to
reinvest dividends; no 12b-1 marketing fees; free telephone exchange.
Investment Manager. Founded in 1937 T. Rowe Price Associates, Inc. and its
affiliates managed over $57 billion, including over $5 billion in municipal
bond assets, in over three million individual and institutional investor
accounts as of December 31, 1994.
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.
T. ROWE PRICE
SUMMIT MUNICIPAL FUNDS, INC.
MARCH 1, 1995
PROSPECTUS
CONTENTS
__________________________________________________________________________
1 ABOUT THE FUNDS
__________________________________________________________________________
TRANSACTION AND FUND EXPENSES 2
__________________________________________________________________________
FINANCIAL HIGHLIGHTS 3
FUND, MARKET, AND
__________________________________________________________________________
RISK CHARACTERISTICS 4
__________________________________________________________________________
2 ABOUT YOUR ACCOUNT
__________________________________________________________________________
PRICING SHARES;
RECEIVING SALE PROCEEDS 11
__________________________________________________________________________
DISTRIBUTIONS AND TAXES 12
__________________________________________________________________________
TRANSACTION PROCEDURES AND
SPECIAL REQUIREMENTS 13
__________________________________________________________________________
3 MORE ABOUT THE FUNDS
__________________________________________________________________________
ORGANIZATION AND MANAGEMENT 16
__________________________________________________________________________
UNDERSTANDING FUND PERFORMANCE 17
__________________________________________________________________________
INVESTMENT POLICIES AND PRACTICES 18
__________________________________________________________________________
4 INVESTING WITH T. ROWE PRICE
__________________________________________________________________________
MEETING REQUIREMENTS
FOR NEW ACCOUNTS 26
__________________________________________________________________________
OPENING A NEW ACCOUNT 26
__________________________________________________________________________
PURCHASING ADDITIONAL SHARES 27
__________________________________________________________________________
EXCHANGING AND REDEEMING 28
__________________________________________________________________________
SHAREHOLDER SERVICES 28
__________________________________________________________________________
THIS PROSPECTUS CONTAINS INFORMATION YOU SHOULD KNOW BEFORE INVESTING. PLEASE
KEEP IT FOR FUTURE REFERENCE. A STATEMENT OF ADDITIONAL INFORMATION ABOUT THE
FUNDS, DATED MARCH 1, 1995 HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION AND IS INCORPORATED BY REFERENCE IN THIS PROSPECTUS.
TO OBTAIN A FREE COPY, CALL 1-800-977-1577.
1 ABOUT THE FUNDS
Transaction and Fund Expenses
__________________________________________________________________________
EXPENSE RATIOS FOR THE SUMMIT MUNICIPAL FUNDS ARE SUBSTANTIALLY BELOW THEIR
INDUSTRY AVERAGES.
Each T. Rowe Price Summit Municipal Fund has a single, all-inclusive fee
covering investment management and operating expenses. This fee will not
fluctuate. In contrast, most mutual funds have a fixed management fee plus a
fee for operating expenses that varies according to a number of factors. (See
"How are fund expenses determined?" under "The Funds' Organization and
Management.")
In Table 1 below, "Shareholder Transaction Expenses" shows that you pay no
direct sales charges. All the money you invest in a fund goes to work for you,
subject to the fees explained below. "Annual Fund Expenses" shows how much it
will cost to operate each fund for a year. These are costs you pay indirectly,
because they are deducted from each fund's total assets before the daily share
price is calculated and before dividends and other distributions are made. In
other words, you will not see these expenses on your account statement.
__________________________________________________________________________
LIKE ALL T. ROWE PRICE FUNDS, THE SUMMIT MUNICIPAL FUNDS ARE 100% NO LOAD.
Shareholder Transaction Expenses
Money Market Intermediate Income
__________________________________________________________________________
Sales charge "load"
on purchases None None None
__________________________________________________________________________
Sales charge "load" on
reinvested dividends None None None
__________________________________________________________________________
Redemption fees None None None
__________________________________________________________________________
Exchange fees None None None
__________________________________________________________________________
Annual Fund Expenses Percentage of Fiscal 1994 Average Net Assets
Money Market Intermediate Income
__________________________________________________________________________
Management fee* 0.45% 0.50% 0.50%
__________________________________________________________________________
Distribution (12b-1) fee None None None
__________________________________________________________________________
Other expenses* 0.00% 0.00% 0.00%
__________________________________________________________________________
Total fund expenses* 0.45% 0.50% 0.50%
__________________________________________________________________________
*The management fee includes operating expenses.
Note: The funds charge a $5 fee for wire redemptions under $5,000, subject to
change without notice.
__________________________________________________________________________
Table 1
o Hypothetical example: Assume you invest $1,000, the fund returns 5%
annually, expense ratios remain as listed above, and close your account
at the end of the time periods shown.
__________________________________________________________________________
THE TABLE AT RIGHT IS JUST AN EXAMPLE, AND ACTUAL EXPENSES CAN BE HIGHER OR
LOWER THAN THOSE SHOWN.
1 year 3 years 5 years 10 years
__________________________________________________________________________
Money Market $5 $14 $25 $57
__________________________________________________________________________
Intermediate 5 16 28 63
__________________________________________________________________________
Income 5 16 28 63
__________________________________________________________________________
Table 2
Financial Highlights
The following table provides information about each fund's financial history.
It is based on a single share outstanding for the period October 29, 1993
(commencement of operations) to October 31, 1994. The table is part of each
fund's financial statements which are included in the funds' annual report and
incorporated by reference into the Statement of Additional Information. This
document is available to shareholders upon request. The financial statements
in the annual report have been audited by Coopers & Lybrand L.L.P.,
independent accountants whose unqualified report covers the period shown.
<TABLE>
<CAPTION>
_________________________________________________________________________________________________________
Investment Activities Distributions
Net Realized
Net and
Asset Unrealized Total
Value, Net Gain from Net Net
Year Ended,BeginningInvestment (Loss) on Investment Investment Realized Total
October 31 of Period Income Investments Activities Income Gain Distributions
__________________________________________________________________________________________________________
Money Market Fund
<S> <C> <C> <C> <C> <C> <C> <C>
1994 $1.000 $0.023 - $0.023 $(0.023) - -
Intermediate Fund
1994 $10.00 $0.43 $(0.41) $0.02 $(0.43) - -
Income Fund
1994 $10.00 $0.50 $(0.92) $(0.42) $(0.50) - -
_________________________________________________________________________________________________________
<CAPTION>
End of Period
Ratio of Net
Net Asset Total Return Ratio of Investment
Value, (Includes Expenses Income Portfolio
End Reinvested Net Assets to Average to Average Turnover
of Period Dividends) ($ Thousands) Net Assets Net Assets Rate
_________________________________________________________________________________________________________
Money Market Fund
<C> <C> <C> <C> <C> <C>
$1.000 2.35% $ 42,592 0.45%* 2.56%* -
Intermediate Fund
$9.59 0.18% $ 13,309 0.50%* 4.50%* 157.5%*
Income Fund
$9.08 (4.38%) $ 6,453 0.50%* 5.23%* 161.1%*
_________________________________________________________________________________________________________
<FN>
* Annualized
</FN>
_________________________________________________________________________________________________________
Table 3
</TABLE>
Fund, Market, and Risk Characteristics: What to Expect
To help you decide which of the T. Rowe Price Summit Municipal Funds may be
appropriate for you, this section takes a closer look at their special
benefits, the fixed-income markets in which they invest, as well as their
investment programs.
How do I benefit from investing in the T. Rowe Price Summit Municipal funds?
__________________________________________________________________________
INVESTING IN THE T. ROWE PRICE SUMMIT MUNICIPAL FUNDS OFFERS SOME SPECIAL
BENEFITS.
You gain the advantages of funds that are tailored specifically to the needs
of self-directed individuals with substantial assets to invest in fixed-income
securities. The funds offer such investors three key benefits:
o Access to professionally managed, diversified portfolios of municipal
securities.
o A low-cost structure that translates into higher returns, all else being
equal.
o Services designed to help you manage your investments more effectively
and efficiently.
How do the funds achieve their low-cost advantage?
The advantage reflects their more favorable ratio of expenses to assets. The
$25,000 initial purchase requirement means that the average account balance in
each Summit fund is high. Since shareholder recordkeeping costs-a substantial
portion of fund expenses-are basically the same for all sizes of accounts, a
fund with larger account balances can spread the expenses over more investment
dollars, achieving a low overall expense ratio. Expenses are deducted from
fund assets before dividends are paid, as explained on the previous page, so
lower costs result in higher dividends for Summit shareholders.
What services can I expect to be available?
Unlike some mutual funds, low costs do not mean any reduction in service for
Summit fund investors. On the contrary, you will not only receive the wide
range of services available to all T. Rowe Price shareholders, but also have
access to specially trained fixed-income service representatives and timely
market information to help you manage your accounts.
What is each Summit fund's objective and investment program?
Municipal Money Market Fund. This fund's objectives are preservation of
capital, liquidity, and consistent with these, the highest possible current
income exempt from federal income taxes. The fund's yield will fluctuate in
response to changes in interest rates. Unlike most bank accounts or
certificates of deposit, the fund is not insured or guaranteed by the U.S.
Government.
All securities purchased will have ratings in the two highest categories
established by nationally recognized rating agencies or, if unrated, will be
of equivalent quality as determined by T. Rowe Price. The fund will generally
purchase money market securities with maturities of 13 months or less, and its
dollar-weighted average maturity will not exceed 90 days.
Municipal Intermediate Fund. The fund's objective is to provide the highest
possible income exempt from federal income taxes consistent with moderate
price fluctuation. There is no limit on the maturity of individual securities,
but the fund's dollar-weighted average effective maturity will normally be
between five and 10 years. Targeting effective maturity provides additional
flexibility in portfolio management but, all else being equal, could result in
higher volatility than would be true of a fund targeting a stated maturity or
maturity range.
The fund will consist primarily of investment-grade municipal bonds rated from
AAA to BBB by a nationally recognized rating agency or, if unrated, the
equivalent as determined by T. Rowe Price. To enhance yield, up to 10% of
total assets may be invested in below-investment-grade bonds, including those
with the lowest rating.
__________________________________________________________________________
FOR MORE DETAILED DESCRIPTIONS OF EACH FUND'S SECURITIES, SEE "INVESTMENT
POLICIES AND PRACTICES."
Municipal Income Fund. The fund's objective is to provide a high level of
income exempt from federal income taxes. The fund will invest primarily in
long-term, investment-grade municipal bonds rated from AAA to BBB by a
nationally recognized rating agency or, if unrated, the equivalent as
determined by T. Rowe Price. The fund may purchase securities of any maturity,
and its dollar-weighted average maturity normally will be 10 years or longer.
To enhance income, up to 20% of assets may be invested in below-investment-
grade securities, including those with the lowest rating. The fund may be
suitable for investors who are comfortable with a higher level of principal
fluctuation than is characteristic of either shorter-term bond funds or
long-term funds investing exclusively in investment-grade bonds.
What are the major differences between money market and bond funds?
__________________________________________________________________________
BEFORE CHOOSING A FUND, YOU MAY FIND IT HELPFUL TO REVIEW SOME FUNDAMENTALS OF
FIXED-INCOME INVESTING.
o Price - Like all bond funds, the fund has a fluctuating share price.
Money market funds are managed to maintain a stable share price.
o Maturity - Intermediate-term bond funds have longer average maturities
(from one to five years) than money market funds (90 days or less).
Longer-term bond funds have the longest average maturities (10 years or
more). Of course, unlike a money market fund, the share prices of bond
funds will fluctuate and your investment may be worth more or less on
redemption than at purchase.
o Income - Intermediate-term bond funds typically offer more income than
money market funds and less income than longer-term bond funds.
Is a fund's yield fixed or will it vary?
It will vary. The yield is calculated every day by dividing a fund's net
income per share, expressed at annual rates, by the share price. Since both
income and share price will fluctuate, a fund's yield will also vary.
(Although money fund prices are stable, income is variable.)
Is a fund's "yield" the same thing as the "total return"?
"No" for bond funds. Your total return is the result of reinvested income and
the change in share price for a given time period. Income is always a positive
contributor to total return and can enhance a rise in share price or serve as
an offset to a drop in share price. Since money funds are managed to maintain
a stable share price, however, their yield and total return should be the
same.
What is "credit quality" and how does it affect a fund's yield?
Credit quality refers to a bond issuer's expected ability to make all required
interest and principal payments in a timely manner. Because highly rated bond
issuers represent less risk, they can borrow at lower interest rates than less
creditworthy issuers. Therefore, a fund investing in high-quality securities
should have a lower yield than an otherwise comparable fund investing in lower
credit-quality securities.
What is meant by a bond's or a fund's maturity?
Every bond has a stated maturity date when the issuer must repay the
security's entire principal value to the investor. Some types of bonds may
also have an "effective maturity" that is shorter than the stated date. Many
corporate and municipal bonds are "callable," meaning their principal can be
repaid before their stated maturity dates on (or after) specified call dates.
Bonds are most likely to be called when interest rates are falling, because
the issuer wants to refinance at a lower rate. In such an environment, a
bond's "effective maturity" is usually its nearest call date.
A bond or money market mutual fund has no maturity in the strict sense of the
word, but does have a dollar-weighted average maturity. This number is an
average of the stated maturities of the underlying bonds, with each maturity
"weighted" by the percentage of fund assets it represents. Funds that target
effective maturities would use the effective (rather than stated) maturities
of the underlying instruments when computing the average. Targeting effective
maturity provides additional flexibility in portfolio management but, all else
being equal, could result in higher volatility than a fund targeting a stated
maturity or maturity range.
What is a bond's or bond fund's "duration"?
Duration is the time-weighted value of discounted future interest and
principal payments expressed in years. It is a better measure than maturity of
bond price sensitivity to interest rate changes because it takes into account
the time value of cash flows generated over the bond's life. Future interest
and principal payments are discounted to reflect their present value and then
are multiplied by the number of years they will be received to produce a value
that is expressed in years, i.e., the duration. A more refined measure than
average maturity, effective duration takes into account call features and
sinking fund payments which may shorten a bond's life.
Since duration can also be computed for bond funds, you can estimate the
effect of interest rates on a bond fund's share price. Simply multiply the
fund's duration (available for T. Rowe Price bond funds in our quarterly
shareholder reports) by an expected change in interest rates. For example, the
price of a bond fund with a duration of five years would be expected to fall
approximately 5% if rates rose by one percentage point.
How is a bond's price affected by changes in interest rates?
When interest rates rise, a bond's price usually falls, and vice versa.
__________________________________________________________________________
IN GENERAL, THE LONGER THE BOND'S MATURITY, THE GREATER THE PRICE INCREASE AND
DECREASE IN RESPONSE TO A GIVEN CHANGE IN INTEREST RATES, AS SHOWN IN THE
TABLE TO THE RIGHT.
__________________________________________________________________________
How Interest Rates Affect Bond Prices
Bond
Maturity Coupon Price Per $1,000 of a Municipal Bond If Interest Rates:
Increase Decrease
1% 2% 1% 2%
__________________________________________________________________________
1 Year 4.15% $990 $981 $1,010 $1,020
__________________________________________________________________________
5 Years 5.20 958 917 1,045 1,092
__________________________________________________________________________
10 Years 5.70 928 862 1,079 1,166
__________________________________________________________________________
20 Years 6.40 896 808 1,121 1,264
__________________________________________________________________________
30 Years 6.50 881 784 1,146 1,327
__________________________________________________________________________
Table 4 Coupons reflect yields on AAA-rated municipals as of October 31,
1994. This is an illustration and does not represent expected
yields or share-price changes of any T. Rowe Price Fund.
Do money market securities react to changes in interest rates?
Yes. As interest rates change, the prices of money market securities
fluctuate, but changes are usually small because of their very short
maturities.
What are the main risks of investing in bond and money market funds?
Since they are managed to maintain a $1.00 share price, money market funds
should have little risk of principal loss. The potential for realizing a loss
of principal in a bond or money market fund could derive from:
o Interest rate or market risk - the decline in the prices of fixed-income
securities and funds that may accompany a rise in the overall level of
interest rates. A sharp and unexpected rise in interest rates could
cause a money fund's price to drop below a dollar. However, the
extremely short-term securities held in money market portfolios-a means
of achieving an overall fund objective of principal safety-reduces much
of their potential for price fluctuation.
o Credit risk - the chance that any of a fund's holdings will have its
credit rating downgraded or will default (fail to make scheduled
interest and principal payments), potentially reducing the fund's income
level and/or share price.
How does T. Rowe Price try to reduce risk?
Consistent with each fund's objective, the portfolio manager actively manages
bond and money funds in an effort to manage risk and increase total return.
Risk management tools include:
o Diversification of assets to reduce the impact of a single holding on a
fund's net asset value;
o Thorough credit research by our own analysts; and
o Adjustments in a fund's duration to try to reduce the negative impact of
rising interest rates or take advantage of the favorable effects of
falling rates. Depending on market outlook, the investment manager may
shorten or lengthen the fund's average effective maturity within the
ranges and guidelines established in this prospectus.
What are the funds' policies on derivative investments? (Intermediate and
Income Funds)
The fund will invest in derivatives only if the expected rewards and risks or
their effect on the portfolio as a whole are consistent with the funds'
objectives, policies, and overall risk profile as described in this
prospectus. The funds may invest in derivatives for one or more of the
following purposes: to increase yield; to hedge against risk or adjust the
portfolio's overall risk level; to change the fund's duration; or to
capitalize on a specific market viewpoint.
A number of important points should be kept in mind regarding derivatives:
o The definition of "derivative" is very broad and can be applied to
investments representing a wide range of potential risks and rewards. A
derivative is defined as a financial instrument whose value is derived
from an underlying security (e.g., a stock or bond) or a market
benchmark (e.g., an interest rate index). Variable rate notes, stripped
mortgage securities, and bond futures and options are among the many
examples of derivatives.
o While conventional derivatives may not entail any more risk than
traditional investments, other types can involve significantly greater
risk. The amount of risk may not be indicated by the instrument's credit
rating.
o The evolution of the derivatives market has fostered new ways to
understand, measure, and manage financial risk. When used appropriately,
derivatives can be useful and efficient portfolio management tools. When
used inappropriately, however, they may increase risk. The success or
failure of a particular derivative investment should be measured against
its intended purpose. For example, a bond future may lose money but
succeed in hedging (protecting) a portfolio against an adverse change in
interest rates.
Who issues municipal securities?
__________________________________________________________________________
THESE ARE SOME CHARACTERISTICS OF MUNICIPAL SECURITIES.
State and local governments and governmental authorities sell notes and bonds
(usually called "municipals") to pay for public projects and services.
Who buys municipal securities?
Individuals are the primary investors, and a principal way they invest is
through mutual funds. Prices of municipals may be affected by major changes in
flows of money into or out of municipal funds. For example, substantial and
sustained redemptions from municipal bond funds could result in lower prices
for these securities.
Is interest income from municipal issues always exempt from federal taxes?
__________________________________________________________________________
MUNICIPAL SECURITIES ARE ALSO CALLED "TAX-EXEMPTS" BECAUSE THE INTEREST INCOME
THEY PROVIDE IS USUALLY EXEMPT FROM FEDERAL INCOME TAXES.
No. For example, since 1986, income from so-called "private activity"
municipals has been subject to the federal alternative minimum tax (AMT). For
example, some bonds financing airports, stadiums, and student loan programs
fall into this category. Shareholders subject to the AMT must include income
derived from private-activity bonds in their AMT calculation. Relatively few
taxpayers are required to pay the tax. The funds will report annually to
shareholders the portion of income, if any, subject to AMT. (Please see
"Distributions and Taxes-Taxes on Fund Distributions.")
Why are yields on municipals usually below those on otherwise comparable
taxable securities?
Since the income provided by most municipals is exempt from federal taxation,
investors are willing to accept lower yields on a municipal bond than on an
otherwise similar (in quality and maturity) taxable bond.
How can I tell if a tax-exempt or taxable fund is more suitable for me?
__________________________________________________________________________
HERE IS SOME INFORMATION TO HELP YOU CHOOSE THE FUND THAT'S RIGHT FOR YOU.
The primary factor is your expected federal income tax rate. The higher your
tax bracket, the more likely tax-exempts will be appropriate. If the after-tax
yield on a taxable bond or money market is less than a municipal fund's
tax-exempt yield, then your income will be higher in the municipal fund. To
find what a taxable fund would have to yield to equal the yield on a municipal
bond, divide the municipal bond's yield by one minus your tax rate. For quick
reference, the table below shows a range of taxable equivalent yields.
__________________________________________________________________________
If your federal A tax-free yield of
tax rate is:
2% 3% 4% 5% 6%
equals a taxable yield of:
__________________________________________________________________________
28% 2.8 4.2 5.6 6.9 8.3
__________________________________________________________________________
31% 2.9 4.3 5.8 7.2 8.7
__________________________________________________________________________
36% 3.1 4.7 6.3 7.8 9.4
__________________________________________________________________________
39.6% 3.3 5.0 6.6 8.3 9.9
__________________________________________________________________________
Table 5
How does each fund's overall credit quality relate to its investment
objective?
__________________________________________________________________________
PRICES OF BOND FUND SHARES WILL FLUCTUATE. WHEN YOU SELL YOUR SHARES, YOU MAY
LOSE MONEY.
Investing exclusively in high-quality securities, helps the Money Market Fund
pursue its primary goal-safety of principal. To secure a higher income with
only moderate principal fluctuation, the Intermediate Fund invests at least
90% of assets in investment-grade securities (rated AAA through BBB), which
provide a wider range of income opportunities with some additional credit
risk. In keeping with its higher risk/reward profile, the Income Fund invests
at least 80% of assets in investment-grade securities and may also seek to
enhance income through a maximum position of 20% in below-investment-grade
bonds, including those with the lowest rating. Like all portfolio holdings,
these securities are subject to rigorous credit research conducted by T. Rowe
Price analysts. (For further discussion, see "Investment Policies and
Practices-High Yield Investing.")
How can I decide which investments are most appropriate for me?
__________________________________________________________________________
THE FUND OR FUNDS YOU SELECT SHOULD REFLECT YOUR INDIVIDUAL INVESTMENT GOALS,
BUT SHOULD NOT REPRESENT YOUR COMPLETE INVESTMENT PROGRAM. NO FUND SHOULD BE
USED FOR SHORT-TERM TRADING PURPOSES.
Review your own financial objectives, time horizon, and risk tolerance. Use
the table on the following page, which summarizes the funds' main
characteristics, to help choose a fund (or funds) for your particular needs.
For example, only the money fund provides principal stability, which makes it
a good choice for money you may need for contingencies. However, if you are
investing for the highest possible tax-free income and can tolerate price
fluctuation, you should consider a longer-term bond fund.
__________________________________________________________________________
Differences Among Funds
Fund Income Risk of Share- Expected Credit
Price Average Quality
Fluctuation Maturity Categories
__________________________________________________________________________
Municipal No more than Two Highest
Money Lower Stable 90 days
__________________________________________________________________________
Municipal Primarily Four
Intermediate Moderate Moderate 5 to 10 years Highest
__________________________________________________________________________
Municipal 10 years and Primarily Four
Income Higher Higher longer Highest
__________________________________________________________________________
Table 6
Is there additional information about these funds to help me make a decision?
__________________________________________________________________________
EACH FUND CAN INVEST WITHOUT LIMIT IN SECURITIES WHOSE INCOME IS SUBJECT TO
THE ALTERNATIVE MINIMUM TAX. A MAJOR PORTION OF EACH FUND'S ASSETS IS EXPECTED
TO BE INVESTED IN SUCH SECURITIES.
You should review the investment objectives and other details about each fund
set forth on the following pages. Also, be sure to review "Investment Policies
and Practices" in Section 3, which reviews the following topics: Types of
Portfolio Securities (municipal securities, private activity bonds, municipal
lease obligations, securities with puts or other demand features, securities
with credit enhancements, synthetic or derivative securities, private
placements, and high yield/high risk securities); and Types of Management
Practices (cash position, when-issued securities and forwards, interest rate
futures, borrowing money and transferring assets, portfolio turnover, taxable
money market securities, and sector concentration).
2 ABOUT YOUR ACCOUNT
Pricing Shares and Receiving Sale Proceeds
Here are some procedures you should know when investing in a fund.
How and when shares are priced
__________________________________________________________________________
THE VARIOUS WAYS YOU CAN BUY, SELL, AND EXCHANGE SHARES ARE EXPLAINED AT THE
END OF THIS PROSPECTUS AND ON THE NEW ACCOUNT FORM.
Bond and Money Funds. The share price (also called "net asset value" or NAV
per share) for a fund is calculated at 4 p.m. ET each day the New York Stock
Exchange is open for business. To calculate the NAV, the fund's assets are
valued and totaled, liabilities are subtracted, and the balance, called net
assets, is divided by the number of shares outstanding.
Money fund NAVs, which are managed to remain at $1.00, are calculated at noon
ET each day as well as 4 p.m. Amortized cost or amortized market value is used
to value money fund securities that mature in 60 days or less.
How your purchase, sale, or exchange price is determined
__________________________________________________________________________
WHEN FILLING OUT THE NEW ACCOUNT FORM, YOU MAY WISH TO GIVE YOURSELF THE
WIDEST RANGE OF OPTIONS FOR RECEIVING PROCEEDS FROM A SALE.
If we receive your request in correct form before 4 p.m. Et, your transaction
will be priced at that day's nav. If we receive it after 4 p.m., it will be
priced at the next business day's nav.
We cannot accept orders that request a particular day or price for your
transaction or any other special conditions.
Note: The time at which transactions are priced and until which orders are
accepted may be changed in case of an emergency or if the New York Stock
Exchange closes at a time other than 4 p.m. ET.
How you can receive the proceeds from a sale
If your request is received by 4 p.m. ET in correct form, proceeds are usually
sent the next business day. Proceeds can be sent to you by mail, or to your
bank account by ACH transfer or bank wire. Proceeds sent by ACH transfer
should be credited the second day after the sale. ACH (Automated Clearing
House) is an automated method of initiating payments from and receiving
payments in your financial institutional account. ACH is a payment system
supported by over 20,000 banks, savings banks and credit unions, which
electronically exchanges the transactions through the Federal Reserve Banks.
Proceeds sent by bank wire should be credited to your account the next
business day.
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IF FOR SOME REASON WE CANNOT ACCEPT YOUR REQUEST TO SELL SHARES, WE WILL
CONTACT YOU.
Exception:
o Under certain circumstances and when deemed to be in a fund's best
interests, your proceeds may not be sent for up to five business days
after receiving your sale or exchange request. If you were exchanging
into another bond or money fund, your new investment would not begin to
earn dividends until the sixth business day.
Useful Information on Distributions and Taxes
Dividends and other distributions
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THE FUND DISTRIBUTES ALL NET INVESTMENT INCOME AND REALIZED CAPITAL GAINS TO
SHAREHOLDERS.
Dividend and capital gain distributions are reinvested in additional fund
shares in your account unless you select another option on your New Account
Form. The advantage of reinvesting distributions arises from compounding; that
is, you receive dividends and capital gain distributions on a rising number of
shares.
Distributions not reinvested are paid by check or transmitted to your bank
account via ACH. If the Post Office 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.
Income dividends
o Bond funds declare income dividends daily at 4 p.m. ET to shareholders
of record at that time provided payment has been received on the
previous business day.
o Money funds declare income dividends daily at noon ET to shareholders of
record at that time provided payment has been received by that time.
o Bond and money fund shares will earn dividends through the date of
redemption; shares redeemed on a Friday or prior to a holiday will
continue to earn dividends until the next business day. Generally, if
you redeem all of your shares at any time during the month, you will
also receive all dividends earned through the date of redemption in the
same check. When you redeem only a portion of your shares, all dividends
accrued on those shares will be reinvested, or paid in cash, on the next
dividend payment date.
Capital gains
o A capital gain or loss is the difference between the purchase and sale
price of a security.
o If the fund has net capital gains for the year (after subtracting any
capital losses), they are usually declared and paid in December to
shareholders of record on a specified date that month. If a second
distribution is necessary, it is usually declared and paid during the
first quarter of the following year.
Tax information
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THE FUNDS SEND TIMELY INFORMATION FOR YOUR TAX FILING NEEDS.
Although the regular monthly income dividends you receive from the funds are
expected to be exempt from federal income taxes (other than the AMT, to the
extent you are subject to it), you need to be aware of the possible tax
consequences when:
o you sell fund shares, including an exchange from one fund to another, or
o a fund makes a short- and/or long-term capital gain distribution to your
account.
Due to 1993 tax legislation, a portion of the capital gains realized on the
sale of market discount bonds with maturities beyond one year may be treated
as ordinary income and cannot be offset by other capital losses. Therefore to
the extent the fund invests in these securities, the likelihood of a taxable
gain distribution will be increased.
Note: You must report your total tax-exempt income on IRS Form 1040. The IRS
uses this information to help determine the tax status of any social security
payments you may have received during the year.
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THE FUNDS FURNISH AVERAGE COST AND CAPITAL GAIN (LOSS) INFORMATION ON MOST
SHARE REDEMPTIONS.
Taxes on fund redemptions. When you sell shares in any fund, you may realize a
gain or loss. An exchange from one fund to another is still a sale for tax
purposes. If you realize a loss on the sale or exchange of fund shares held
for six months or less, your capital loss is reduced by the tax-exempt
dividends received on those shares.
In January, the funds will send you Form 1099-B indicating the date and amount
of each sale you made in the fund during the prior year. This information is
also reported to the IRS. For accounts opened new or by exchange in 1983 or
later, we will provide you the gain or loss of the shares you sold during the
year, based on the "average cost" method. This information is not reported to
the IRS, and you do not have to use it. You may calculate the cost basis using
other methods acceptable to the IRS, such as "specific identification."
To help you maintain accurate records, we send you a confirmation immediately
following each transaction (except for systematic purchases and redemptions)
you make and a year-end statement detailing all your transactions in each fund
account during the year.
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CAPITAL GAIN DISTRIBUTIONS ARE TAXABLE WHETHER REINVESTED IN ADDITIONAL SHARES
OR RECEIVED IN CASH.
Taxes on fund distributions. In January, the funds will send you Form 1099-DIV
indicating the tax status of any capital gain distribution made to you. This
information will also be reported to the IRS. All capital gain distributions
are taxable to you for the year in which they are paid. Dividends are expected
to be tax-exempt.
Short-term capital gains are taxable as ordinary income and long-term gains
are taxable at the applicable long-term gain rate. The gain is long- or
short-term depending on how long the fund held the securities, not how long
you held shares in the fund.
If the funds invest in certain "private activity" bonds, shareholders who are
subject to the AMT must include income generated by these bonds in their AMT
computation. The portion of your fund's income which should be included in
your AMT calculation, if any, will be reported to you in January.
Tax effect of buying shares before a capital gain distribution. If you buy
shares near or on the "record date"-the date that establishes you as the
person to receive the upcoming distribution-you will receive in the form of a
taxable distribution a portion of the money you just invested. Therefore, you
may wish to find out a fund's record date before investing. Of course, a
fund's share price may at any time reflect undistributed capital gains or
unrealized appreciation.
Transaction Procedures and Special Requirements
Purchase Conditions
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FOLLOWING THESE PROCEDURES HELPS ASSURE TIMELY AND ACCURATE TRANSACTIONS.
Nonpayment. If your payment is not received or you pay with a check or ACH
transfer that does not clear, your purchase will be cancelled. You will be
responsible for any losses or expenses incurred by the fund or transfer agent,
and the fund can redeem shares you own in this or another identically
registered T. Rowe Price fund as reimbursement. The fund and its agents have
the right to reject or cancel any purchase, exchange, or redemption due to
nonpayment.
U.S. dollars. All purchases must be paid for in U.S. dollars; checks must be
drawn on U.S. banks.
Sale (Redemption) Conditions
10-day hold. If you sell shares that you just purchased and paid for by check
or ACH transfer, the fund will process your redemption but will generally
delay sending you the proceeds for up to 10 calendar days to allow the check
or transfer to clear. If your redemption request was sent by mail or mailgram,
proceeds will be mailed no later than the seventh day following receipt unless
the check or ACH transfer has not cleared. If, during the clearing period, we
receive a check drawn against your bond or money market account, it will be
returned marked "uncollected." (The 10-day hold does not apply to purchases
paid for by: bank wire; cashier's, certified, or treasurer's checks; or
automatic purchases through your paycheck.)
Telephone, Tele*Access(registered trademark) and PC*Access(registered
trademark) Transactions. These exchange and redemption services are
established automatically when you sign the New Account Form unless you check
the box which states that you do not want these services. A fund uses
reasonable procedures (including shareholder identity verification) to confirm
that instructions given by telephone are genuine and is not liable for acting
on these instructions. If these procedures are not followed, it is the opinion
of certain regulatory agencies that a 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 promptly after the telephone transaction.
Redemptions over $250,000. Large sales can adversely affect a portfolio
manager's ability to implement a fund's investment strategy by causing the
premature sale of securities that would otherwise be held. If in any 90-day
period, you redeem (sell) more than $250,000, or your sale amounts to more
than 1% of the fund's net assets, the fund has the right to delay sending your
proceeds for up to five business days after receiving your request, or to pay
the difference between the redemption amount and the lesser of the two
previously mentioned figures with securities from the fund.
Excessive Trading
__________________________________________________________________________
T. ROWE PRICE MAY BAR EXCESSIVE TRADERS FROM PURCHASING SHARES.
Frequent trades involving either substantial fund assets, or a substantial
portion of your account or accounts controlled by you, can disrupt management
of the fund and raise its expenses. We define "excessive trading" as exceeding
one purchase and sale involving the same fund within any 120-day period.
For example, you are in fund A. You can move substantial assets from fund A to
fund B, and, within the next 120 days, sell your shares in fund B to return to
fund A or move to fund C.
If you exceed the number of trades described above, you may be barred
indefinitely from further purchases of T. Rowe Price funds.
Three types of transactions are exempt from excessive trading guidelines: 1)
trades solely between money market funds; 2) redemptions that are not part of
exchanges; and 3) systematic purchases or redemptions (see "Shareholder
Services").
Keeping Your Account Open
Due to the relatively high cost to the fund of maintaining small accounts, we
ask you to maintain an account balance of at least $10,000. If your balance is
below $10,000 for three months or longer, the fund has the right to close your
account after giving you 60 days in which to increase your balance. (These
conditions may vary for retirement plan accounts.)
Signature Guarantees
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A SIGNATURE GUARANTEE IS DESIGNED TO PROTECT YOU AND THE FUND FROM FRAUD BY
VERIFYING YOUR SIGNATURE.
You may need to have your signature guaranteed in certain situations, such as:
o Written requests 1) to redeem over $50,000, or 2) to wire redemption
proceeds.
o Remitting redemption proceeds to any person, address, or bank account
not on record.
o Transferring redemption proceeds to a T. Rowe Price fund account with a
different registration from yours.
o Establishing certain services after the account is opened.
You can obtain a signature guarantee from most banks, savings institutions,
broker/dealers and other guarantors acceptable to T. Rowe Price. We cannot
accept guarantees from notaries public or organizations that do not provide
reimbursement in the case of fraud.
3 MORE ABOUT THE FUNDS
The Funds' Organization and Management
How are the funds organized?
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SHAREHOLDERS BENEFIT FROM T. ROWE PRICE'S 58 YEARS OF INVESTMENT MANAGEMENT
EXPERIENCE.
The funds are "diversified, open-end investment companies," or mutual funds,
and were incorporated in Maryland in 1993. Mutual funds pool money received
from shareholders and invest it to try to achieve specified objectives.
What is meant by "shares"?
As with all mutual funds, investors purchase "shares" when they invest in a
fund. These shares are part of a fund's authorized capital stock, but share
certificates are not issued.
Each share and fractional share entitles the shareholder to:
o receive a proportional interest in a fund's income and capital gain
distributions;
o cast one vote per share on certain fund matters, including the election
of fund directors, changes in fundamental policies, or approval of
changes in a fund's management contract.
Does each fund have an annual shareholder meeting?
The funds are not required to hold annual meetings and do not intend to do so
except when certain matters, such as a change in a fund's fundamental
policies, are to be decided. In addition, shareholders representing at least
10% of all eligible votes may call a special meeting if they wish for the
purpose of voting on the removal of any fund director(s). If a meeting is held
and you cannot attend, you can vote by proxy. Before the meeting, the fund
will send you proxy materials that explain the issues to be decided and
include a voting card for you to mail back.
Who runs the funds?
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ALL DECISIONS REGARDING THE PURCHASE AND SALE OF FUND INVESTMENTS ARE MADE BY
T. ROWE PRICE - SPECIFICALLY BY THE FUNDS' PORTFOLIO MANAGERS.
General Oversight. The funds are governed by a Board of Directors that meets
regularly to review the fund's investments, performance, expenses, and other
business affairs. The Board elects the funds' officers. The policy of each
fund is that a majority of Board members will be independent of T. Rowe Price.
Portfolio Management. Each fund has an Investment Advisory Committee, whose
members are listed below. Each 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.
Municipal Money Market Fund. Patrice L. Berchtenbreiter, Chairman, Michael P.
Buckley, Patricia S. Deford, Mary J. Miller, William T. Reynolds, and Theodore
E. Robson. Ms. Berchtenbreiter joined T. Rowe Price in 1972 and has been
managing investments since 1986.
Municipal Intermediate Fund. Mary J. Miller, Chairman, Janet G. Albright,
Patricia S. Deford, Charles B. Hill, Konstantine B. Mallas, Laura L. McAree,
and William T. Reynolds. Ms. Miller joined T. Rowe Price in 1983 and has been
managing investments since 1987.
Municipal Income Fund. William T. Reynolds, Chairman, Patricia S. Deford,
Charles B. Hill, Mary J. Miller, Konstantine B. Mallas, Hugh D. McGuirk,
William F. Snider, Jr., and C. Stephen Wolfe, II. Mr. Reynolds has been
managing investments since joining T. Rowe Price in 1981.
Marketing. T. Rowe Price Investment Services, Inc., a wholly-owned subsidiary
of T. Rowe Price, distributes (sells) shares of this and all other T. Rowe
Price funds.
Shareholder Services. T. Rowe Price Services, Inc., another wholly-owned
subsidiary, acts as the funds' transfer and dividend disbursing agent and
provides shareholder and administrative services. The address for T. Rowe
Price Investment Services, Inc., and T. Rowe Price Services is 100 East Pratt
St., Baltimore, MD 21202.
How are fund expenses determined?
Under the management agreement, all expenses of the funds will be paid by T.
Rowe Price, except interest, taxes, brokerage commissions, directors' fees and
expenses (including counsel fees and expenses) and extraordinary expenses. The
Board of Directors of the funds reserves the right to impose additional fees
against shareholder accounts to defray expenses which would otherwise be paid
by T. Rowe Price under the management agreement. The Board does not anticipate
levying such charges; such a fee, if charged, may be retained by the fund or
paid to T. Rowe Price.
The Management Fee. Each fund pays T. Rowe Price an annual all-inclusive fee
based on its average daily net assets. The funds calculate and accrue the fee
daily. (See "Transaction and Fund Expenses.")
Understanding Performance Information
This section should help you understand the terms used to describe the funds'
performance. You will come across them in shareholder reports you receive from
us four times a year, in our newsletters, "Insights" reports, in T. Rowe Price
advertisements, and in the media.
Total Return
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TOTAL RETURN IS THE MOST WIDELY USED PERFORMANCE MEASURE. DETAILED PERFORMANCE
INFORMATION IS INCLUDED IN THE FUNDS' ANNUAL REPORTS AND QUARTERLY SHAREHOLDER
REPORTS.
This tells you how much an investment in a fund has changed in value over a
given time period. It reflects any net increase or decrease in the share price
and assumes that all dividends and capital gains (if any) paid during the
period were reinvested in additional shares. Reinvesting distributions means
that total return numbers include the effect of compounding, i.e., you receive
income and capital gain distributions on a rising number of shares.
Advertisements for a fund may include cumulative or compound average annual
total return figures, which may be compared with various indices, other
performance measures, or other mutual funds.
Cumulative Total Return
This is the actual rate of return on an investment for a specified period. A
cumulative return does not indicate how much the value of the investment may
have fluctuated between the beginning and the end of the period specified.
Average Annual Total Return
This is always hypothetical. Working backward from the actual cumulative
return, it tells you what constant year-by-year return would have produced the
actual, cumulative return. By smoothing out all the variations in annual
performance, it gives you an idea of the investment's annual contribution to
your portfolio provided you held it for the entire period in question.
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YOU WILL SEE FREQUENT REFERENCES TO THE FUND'S YIELDS AND TAX EQUIVALENT
YIELDS IN OUR REPORTS, ADVERTISEMENTS, IN MEDIA STORIES, AND SO ON.
Yield
The current or "dividend yield" on the fund or any investment tells you the
relationship between the investment's current level of annual income and its
price on a particular day. The dividend yield reflects the actual income paid
to shareholders for a given period, annualized, and divided by the average
price during the given period. For example, a fund providing $5 of annual
income per share and a price of $50 has a current yield of 10%. Yields can be
calculated for any time period. The Money Market Fund may advertise a
"current" yield, reflecting the latest 7-day income annualized, or an
"effective" yield, which assumes the income has been reinvested in the fund.
For the bond funds, the advertised or "SEC yield" is found by determining the
net income per share (as defined by the SEC) earned by the fund during a
30-day base period and dividing this amount by the per-share price on the last
day of the base period. The "SEC yield" may differ from the dividend yield.
Investment Policies and Practices
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FUND MANAGERS HAVE CONSIDERABLE LEEWAY IN CHOOSING INVESTMENT STRATEGIES AND
SELECTING INVESTMENTS THEY BELIEVE WILL HELP THE FUNDS ACHIEVE THEIR
OBJECTIVES.
This section takes a detailed look at some of the types of securities the
funds may hold in their portfolios and the various kinds of investment
practices that may be used in day-to-day portfolio management. The funds'
investment programs are subject to further restrictions and risks described in
the "Statement of Additional Information." The funds adhere to applicable
investment restrictions and policies at the time it makes an investment. A
later change in circumstances will not require the sale of an investment if it
was proper at the time it was made.
Shareholder approval is required to substantively change a fund's objectives
and certain investment restrictions noted in the following section as
"fundamental policies." The managers also follow certain "operating policies"
which can be changed without shareholder approval. However, significant
changes are discussed with shareholders in fund reports.
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IN PURCHASING MUNICIPALS, THE FUNDS RELY ON THE OPINION OF THE ISSUER'S BOND
COUNSEL REGARDING THE TAX-EXEMPT STATUS OF THE INVESTMENT.
Each fund's holdings of certain kinds of investments cannot exceed maximum
percentages of total assets, which are set forth in the prospectus. For
instance, the Municipal Intermediate Fund is not permitted to invest more than
5% of total assets in residual interest bonds. While these restrictions
provide a useful level of detail about a fund's investment program, investors
should not view them as an accurate gauge of the potential risk of such
investments. For example, in a given period, a 5% investment in residual
interest bonds could have significantly more than a 5% impact on the Municipal
Intermediate Fund's share price. The net effect of a particular investment
depends on its volatility and the size of its overall return in relation to
the performance of all the fund's other investments.
Changes in a fund's holdings, the fund's performance, and the contribution of
various investments are discussed in the shareholder reports we send each
quarter.
Types of Portfolio Securities
In seeking to meet its investment objectives, each fund may invest in any type
of security or instrument (including, except for the money market fund,
certain potentially high risk derivatives) whose yield, credit quality, and
maturity characteristics are consistent with the fund's investment program.
These and some of the other investment techniques the funds may use are
described in the following pages.
Fundamental policy: A fund will not purchase a security if, as a result with
respect to 75% of its total assets, more than 5% of its total assets would be
invested in securities of the issuer or more than 10% of the outstanding
voting securities of the issuer would be held by the fund, provided that these
limitations do not apply to a fund's purchases of securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities.
Municipal Securities. Each fund's assets are invested primarily in various
income-producing, tax-free municipal debt securities. The issuers have a
contractual obligation to pay interest at a stated rate on specific dates and
to repay principal (the bond's face value) on a specified date or dates. An
issuer may have the right to redeem or "call" a bond before maturity, and the
investor may have to reinvest the proceeds at lower rates.
There are two broad categories of municipal bonds. General obligation bonds
are backed by the issuer's "full faith and credit," that is, its full taxing
and revenue raising power. Revenue bonds usually rely exclusively on a
specific revenue source, such as a bridge toll, to generate money for debt
service.
Private Activity Bonds. While income from most municipals is exempt from
federal income taxes, the income from certain types of so-called private
activity bonds (a type of revenue bond) may be subject to the alternative
minimum tax (AMT). However, only persons subject to AMT pay this tax. Private
activity bonds may be issued for purposes such as housing or airports or to
benefit a private company. (Being subject to the AMT does not mean the
investor necessarily pays this tax. For further information, please see
"Distributions and Taxes.")
Operating policy: Each fund may invest without limitation in bonds subject to
the AMT.
In addition to general obligation and revenue bonds, the funds' investments
may include, but are not limited to, the following types of securities:
Municipal Lease Obligations. A lease is not a full faith and credit obligation
of the issuer and is usually backed only by the borrowing government's
unsecured pledge to make annual appropriation for lease payments. There have
been challenges to the legality of lease financing in numerous states and,
from time to time, certain municipalities have considered not appropriating
money to make lease payments. In deciding whether to purchase a lease
obligation, a fund would assess the financial condition of the borrower, the
merits of the project, the level of public support for the project, and the
legislative history of lease financing in the state. These securities may be
less readily marketable than other municipals. The funds may also purchase
unrated lease-obligations. Based on information supplied by T. Rowe Price, the
funds' Board of Directors will periodically review the credit quality of
non-rated leases and assess the likelihood of their being cancelled.
Operating policy: Each fund may invest no more than 20% of its total assets in
these obligations.
Securities with "Puts" or other Demand Features. Some longer-term municipals
give the investor the right to "put" or sell the security at par (face value)
within a specified number of days following the investor's request-usually one
to seven days. This demand feature enhances a security's liquidity by
dramatically shortening its effective maturity and enables it to trade at a
price equal to or very close to par. If the demand feature were terminated
prior to being exercised (for example, because the issuer defaulted) the funds
would hold the longer-term security.
Securities with Credit Enhancements.
o Letters of Credit. Letters of credit are issued by a third party,
usually a bank, to enhance liquidity and/or ensure repayment of
principal and any accrued interest if the underlying municipal security
should default.
o Municipal Bond Insurance. This insurance, which is usually purchased by
the bond issuer from a private, nongovernmental insurance company,
provides an unconditional and irrevocable guarantee that the insured
bond's principal and interest will be paid when due. Insurance does not
guarantee the price of a bond or the share price of any fund. The credit
rating of an insured bond reflects the credit rating of the insurer,
based on its claims paying ability. T. Rowe Price periodically reviews
the credit quality of the insurer.
The obligation of a municipal bond insurance company to pay a claim extends
over the life of each insured bond. Although defaults on insured municipal
bonds have been low to date and municipal insurers have met these claims,
there is no assurance this will continue. A higher than expected default rate
could strain the insurer's loss reserves and adversely affect its ability to
pay claims to bondholders, such as the funds. The number of municipal bond
insurers is relatively small, and not all of them have the highest rating.
o Standby Repurchase Agreements. A Standby Bond Purchase Agreement (SBPA)
is a liquidity facility provided to pay the purchase price of bonds that
cannot be remarketed. The obligation of the liquidity provider (usually
a bank) is only to advance funds to purchase tendered bonds which cannot
be remarketed and does not cover principal or interest under any other
circumstances. The liquidity provider's obligations under the SBPA are
usually subject to numerous conditions, including the continued
creditworthiness of the underlying borrower.
Synthetic or Derivative Securities.
o Residual Interest Bonds (Intermediate and Income Funds). The income
stream provided by an underlying bond is divided to create two
securities, one short-term and one long-term. The interest rate on the
short-term component is reset by an index or auction process normally
every seven to 35 days. After income is paid on the short-term
securities at current rates, the residual income goes to the long-term
securities. Therefore, rising short-term interest rates result in lower
income for the longer-term portion, and vice versa. The longer-term
bonds can be very volatile and may be less liquid than other municipals
of comparable maturity.
Operating policy: Each fund will not invest more than 5% of its total assets
in residual interest bonds.
o Participation Interests. This term covers certain types of securities
created by securities dealers who convert fixed-rate bonds into
short-term, variable-rate certificates. These securities have been
developed in the secondary market to meet the demand for short-term,
tax-exempt securities. The funds will invest only in securities deemed
tax-exempt by a nationally recognized bond counsel. Although these
securities have been in the market for a number of years, there is no
guarantee the interest will continue to be exempt because the IRS has
not issued a definitive ruling on the matter.
Operating policy: Each fund will not invest more than 10% of its total assets
in participation interests.
o Embedded Interest Rate Swaps and Caps (Intermediate and Income Funds).
In a fixed-rate, long-term municipal bond with an interest rate swap
attached to it, the bondholder usually receives the bond's fixed-coupon
payment as well as a variable rate payment that represents the
difference between a fixed rate for the term of the swap (which is
typically shorter than the bond it is attached to) and a variable rate
short-term municipal index. The bondholder receives excess income when
short-term rates remain below the fixed interest rate swap. If
short-term rates rise above the fixed-income swap rate, the bondholder's
income is reduced. At the end of the interest rate swap term, the bond
reverts to a single fixed-coupon payment. Embedded interest rate swaps
enhance yields, but also increase interest rate risk.
An embedded interest rate cap allows the bondholder to receive payments
whenever short-term rates rise above a level established at the time of
purchase. They normally are used to hedge against rising short-term interest
rates.
Both instruments may be volatile and of limited liquidity and their use may
adversely affect a fund's total return.
Operating policy: Each fund will not invest more than 5% of its total assets
in embedded interest rate swaps and caps.
Private Placements. The funds may seek to enhance their yield through the
purchase of private placements. These securities are sold through private
negotiations, usually to institutions or mutual funds, and may have resale
restrictions. Their yields are usually higher than comparable public
securities to compensate the investor for their limited marketability.
Operating policy: A fund may not invest more than 15% (10% for Money Market)
of its net assets in illiquid securities, including unmarketable private
placements.
High Yield/High Risk Investing (Intermediate and Income Funds). The total
return and yield of lower quality (high yield/high risk) bonds, commonly
referred to as "junk bonds," can be expected to fluctuate more than the total
return and yield of higher quality, shorter-term bonds. Junk bonds are
regarded as predominantly speculative with respect to the issuer's continuing
ability to meet principal and interest payments. Successful investment in low
and lower-medium quality bonds involves greater investment risk and is highly
dependent on T. Rowe Price's credit analysis. A real or perceived economic
downturn or higher interest rates could cause a decline in high yield bond
prices, because such events could lessen the ability of issuers to make
principal and interest payments. These bonds are thinly traded and can be more
difficult to sell and value accurately than high-quality bonds. Because
objective pricing data may be less available, judgment may play a greater role
in the valuation process.
Operating policy: The Intermediate Fund may invest up to 10% of total assets
in below-investment-grade bonds, including those with the lowest rating, and
the Income Fund may invest up to 20% of assets in below-investment-grade
securities, including those with the lowest rating.
Types of Management Practices
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CASH RESERVES PROVIDE FLEXIBILITY AND SERVE AS A SHORT-TERM DEFENSE DURING
PERIODS OF UNUSUAL MARKET VOLATILITY.
Cash Reserves (Intermediate and Income Funds). The funds will hold a portion
of their assets in short-term, tax-exempt money market securities maturing in
one year or less. The reserve position: provides flexibility in meeting
redemptions, expenses, and the timing of new investments; can help in
structuring a fund's weighted average maturity; and serves as a short-term
defense during periods of unusual market volatility. Each fund's cash reserve
position will be comprised of short-term investment-grade securities including
tax-exempt commercial paper, municipal notes and short-term maturity bonds.
Some of these securities may have adjustable, variable or floating rates.
When-Issued Securities (All Funds) and Forwards (Intermediate and Income
Funds). New issues of municipals are often sold on a "when-issued" basis, that
is, delivery and payment take place 15-45 days after the buyer has agreed to
the purchase. Some bonds, called "forwards," have longer than standard
settlement dates, in some cases exceeding one to three years. When buying
these securities, the funds identify cash or high-grade marketable securities
held by their custodian equal in value to their commitments for these
securities. The funds do not earn interest on when-issued and forward
securities until settlement, and the value of the securities may fluctuate
between purchase and settlement. Municipal "forwards" typically carry a
substantial yield premium to compensate the buyer for their greater interest
rate, credit, and liquidity risks.
Interest Rate Futures (Intermediate and Income Funds). Futures (a type of
potentially high risk derivative) are often used to manage risk or hedge,
because they enable the investor to buy or sell an asset in the future at an
agreed upon price. The funds may buy and sell futures contracts (and options
on such contracts) for a number of reasons including: to manage exposure to
changes in interest rates and municipal prices; as an efficient means of
adjusting its overall exposure to certain markets; to protect portfolio value;
and to adjust the portfolios duration. The fund may purchase, sell, or write
call and put options on securities and financial indices. Futures contracts
may not always be successful hedges; their prices can be highly volatile;
using them could lower the fund's total return and the potential loss from
their use could exceed a fund's initial investment in such contracts.
Operating policy: Initial margin deposits on futures and premiums on options
used for non-hedging purposes will not equal more than 5% of a fund's net
asset value.
Borrowing Money and Transferring Assets. Each fund can borrow money from banks
as a temporary measure for emergency purposes, to facilitate redemption
requests, or for other proper purposes consistent with each fund's investment
objective and program. Such borrowings may be collateralized with fund assets,
subject to restrictions.
Fundamental policy: Borrowings may not exceed 33 1/3% of total fund assets.
Operating policy: Each fund may not transfer as collateral any portfolio
securities except as necessary in connection with permissible borrowings or
investments and then such transfers may not exceed 33 1/3% of the fund's total
assets. Each fund may not purchase additional securities when borrowings
exceed 5% of total assets.
Portfolio Turnover (Intermediate and Income Funds). Each fund generally
purchases securities with the intention of holding them for investment,
however, when market conditions or other circumstances warrant, securities may
be purchased and sold without regard to the length of time held. Due to the
nature of each fund's investment program fund's portfolio turnover rate may
exceed 100%. Although the funds do not expect to generate any taxable income,
a high turnover rate may increase transaction costs and may affect taxes paid
by shareholders to the extent short-term gains are distributed. The annualized
portfolio turnover rates for the Intermediate and Income funds for the fiscal
year ended October 31, 1994 were 157.5% and 161.1%, respectively.
Taxable Securities. During periods of abnormal market conditions, the funds
are permitted to purchase securities whose interest is taxable by the federal
government. The Money Fund can purchase U.S. Government securities maturing in
25 months or less.
Operating policy: The funds may invest without limit in high-quality,
short-term taxable securities for temporary, defensive purposes.
Sector Concentration. It is possible that a fund could have a considerable
amount of assets (25% or more) in securities that would tend to respond
similarly to particular economic or political developments. An example would
be, securities of issuers related to a single industry, such as health care or
nuclear energy.
Operating policy: A fund will not invest more than 25% of total assets in any
single state or in industrial development bonds of projects in the same
industry (such as solid waste, nuclear utility or airlines). Bonds which are
refunded with escrowed U.S. Government securities are not subject to the 25%
limitation.
Credit Quality Considerations. The credit quality of most bond issues is
evaluated by rating agencies such as Moody's and Standard & Poor's. Credit
quality refers to the issuer's ability to meet all required interest and
principal payments. The highest ratings are assigned to issuers perceived to
be the best credit risks. T. Rowe Price research analysts also evaluate all
portfolio holdings of each fund, including those rated by outside agencies.
The lower the rating on a bond, the higher the yield, other things being
equal.
Table 7 shows the rating scale used by the major rating agencies. T. Rowe
Price considers publicly available ratings, but emphasizes its own credit
analysis when selecting investments.
__________________________________________________________________________
Ratings of Municipal Debt Securities
Moody's Standard & Fitch Investors Definition
Investors Poor's Service, Inc.
Service, Inc. Corporation
__________________________________________________________________________
Long-Term Aaa AAA AAA Highest
quality
________________________________________________________________
Aa AA AA High
quality
________________________________________________________________
A A A Upper medium
grade
________________________________________________________________
Baa BBB BBB Medium
grade
________________________________________________________________
Ba BB BB Speculative
________________________________________________________________
B B B Highly
speculative
________________________________________________________________
Caa CCC, CC CCC, CC Vulnerable to
default
________________________________________________________________
Ca C C Default is
imminent
________________________________________________________________
C D DDD,DD,D Probably in
default
________________________________________________________________
Moody's S&P Fitch
__________________________________________________________________________
Short- Best SP1+ Very F-1+ Except-
Term MIG1/VMIG1 quality strong ionally
quality strong
quality
SP1 Strong F-1 Very
grade strong
quality
_______________________________________________________________
MIG2/VMIG2 High SP2 Satisfac- F-2 Good
tory grade credit
quality
_______________________________________________________________
MIG3/VMIG3 Favorable F-3 Fair
quality credit
quality
_______________________________________________________________
MIG4/VMIG4 Adequate SP3 Specula- F-S Weak
quality tive grade credit
quality
__________________________________________________________________________
Commer-
cial P-1 Superior quality A-1+ Extremely F-1+ Except-
Paper strong ionally
quality strong
quality
A-1 Strong F-1 Very
quality strong
quality
_______________________________________________________________
P-2 Strong quality A-2 Satisfac- F-2 Good
tory credit
quality quality
_______________________________________________________________
P-3 Acceptable quality A-3 Adequate F-3 Fair
quality credit
quality
B Speculative F-S Weak credit
quality quality
C Doubtful
quality
__________________________________________________________________________
Table 7 (continued on next page)
Explanation of Quality Ratings
Bond
Rating Explanation
__________________________________________________________________________
Moody's Investors Aaa Highest quality, smallest degree of investment
Service, Inc. risk.
_____________________________________________________
Aa High quality; together with Aaa bonds, they compose
the high-grade bond group.
_____________________________________________________
A Upper-medium grade obligations; many favorable
investment attributes.
_____________________________________________________
Baa Medium-grade obligations; neither highly protected
nor poorly secured. Interest and principal appear
adequate for the present but certain protective
elements may be lacking or may be unreliable over
any great length of time.
_____________________________________________________
Ba More uncertain, with speculative elements.
Protection of interest and principal payments not
well safeguarded during good and bad times.
_____________________________________________________
B Lack characteristics of desirable investment;
potentially low assurance of timely interest and
principal payments or maintenance of other contract
terms over time.
_____________________________________________________
Caa Poor standing, may be in default; elements of danger
with respect to principal or interest payments.
_____________________________________________________
Ca Speculative in a high degree; could be in default or
have other marked shortcomings.
_____________________________________________________
C Lowest-rated; extremely poor prospects of ever
attaining investment standing.
__________________________________________________________________________
Standard & Poor's AAA Highest rating; extremely strong capacity to pay
Corporation principal and interest.
_____________________________________________________
AA High quality; very strong capacity to pay principal
and interest.
_____________________________________________________
A Strong capacity to pay principal and interest;
somewhat more susceptible to the adverse effects of
changing circumstances and economic conditions.
_____________________________________________________
BBB Adequate capacity to pay principal and interest;
normally exhibit adequate protection parameters, but
adverse economic conditions or changing
circumstances more likely to lead to a weakened
capacity to pay principal and interest than for
higher-rated bonds.
_____________________________________________________
BB, B, Predominantly speculative with respect to the
CCC, issuer's capacity to meet required interest and
CC principal payments. BB-lowest degree of specul-
ation; CC-the highest degree of speculation.
Quality and protective characteristics out-weighed
by large uncertainties or major risk exposure to
adverse conditions.
_____________________________________________________
D In default.
__________________________________________________________________________
Fitch Investors AAA Highest quality; obligor has exceptionally
Service, Inc. strong ability to pay interest and repay principal,
which is unlikely to be affected by reasonably
foreseeable events.
_____________________________________________________
AA Very high quality; obligor's ability to pay
interest and repay principal is very strong.
Because bonds rated in the AAA and AA categories
are not significantly vulnerable to foreseeable
future developments, short-term debt of these
issuers is generally rated F-1+.
_____________________________________________________
A High quality; obligor's ability to pay interest and
repay principal is considered to be strong, but may
be more vulnerable to adverse changes in economic
conditions and circumstances than higher-rated
bonds.
_____________________________________________________
BBB Satisfactory credit quality; obligor's ability to
pay interest and repay principal is considered
adequate. Unfavorable changes in economic
conditions and circumstances are more likely to
adversely affect these bonds and impair timely
payment. The likelihood that the ratings of these
bonds will fall below investment grade is higher
than for higher-rated bonds.
_____________________________________________________
BB, Not investment-grade; predominantly speculative
CCC, with respect to the issuer's capacity to repay
CC, C interest and repay principal in accordance with the
terms of the obligation for bond issues not in
default. BB is least speculative. C is the most
speculative.
__________________________________________________________________________
Table 7 (continued)
4 INVESTING WITH T. ROWE PRICE
Meeting Requirements for New Accounts
Tax Identification Number
__________________________________________________________________________
ALWAYS VERIFY YOUR TRANSACTIONS BY CAREFULLY REVIEWING THE CONFIRMATION WE
SEND YOU. PLEASE REPORT ANY DISCREPANCIES TO SHAREHOLDER SERVICES.
We must have your correct social security or corporate tax identification
number on a signed New Account Form or W-9 Form. Otherwise, federal law
requires the funds to withhold a percentage (currently 31%) of your dividends,
capital gain distributions, and redemptions, and may subject you to an IRS
fine. 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.
Unless you request otherwise, one shareholder report will be mailed to
multiple account owners with the same tax identification number and same zip
code and to shareholders who have requested that their account be combined
with someone else's for financial reporting.
Opening a New Account: $25,000 minimum initial investment
Account Registration
If you own other T. Rowe Price funds, be sure to register any new account just
like your existing accounts so you can exchange among them easily. (The name
and account type would have to be identical.)
By Mail
__________________________________________________________________________
REGULAR MAIL
T. ROWE PRICE
ACCOUNT SERVICES
P.O. BOX 17300
BALTIMORE, MD
21298-9353
MAILGRAM, EXPRESS,
REGISTERED, OR CERTIFIED
MAIL
T. ROWE PRICE
ACCOUNT SERVICES
10090 RED RUN BLVD.
OWINGS MILLS, MD 21117
Please make your check payable to T. Rowe Price Funds (otherwise it will be
returned) and send your check together with the New Account Form to the
address at left. We do not accept third party checks, except for IRA rollover
checks, to open new accounts.
By Wire
o Call Investor Services for an account number and give the following wire
address to your bank: Morgan Guaranty Trust Co. of New York, ABA#
021000238, T. Rowe Price [fund name], AC-00153938, account name(s), and
account number.
o Complete a New Account Form and mail it to one of the appropriate
addresses listed at left.
Note: No services will be established and IRS penalty withholding may occur
until a signed New Account Form is received.
By Exchange
Call Shareholder Services or use Tele*Access(registered trademark) or
PC*Access(registered trademark) (See "Automated Services" under "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
explanation of "Excessive Trading" under "Transaction Procedures.")
In Person
Drop off your New Account Form at any of the locations listed below and obtain
a receipt.
Drop-off locations
101 East Lombard St. T. Rowe Price Farragut Square ARCO Tower
Baltimore, MD Financial Center 900 17th St., N.W. 31st Floor
10090 Red Run Washington, DC 515 South
Blvd. Flower St.
Owings Mills, MD Los Angeles,
CA
Note: The fund and its agents reserve the right to waive or lower investment
minimums; to accept initial purchases by telephone or mailgram; cancel or
rescind any purchase or exchange (for example, if an account has been
restricted due to excessive trading or fraud) upon notice to the shareholder
within five business days of the trade or if the written confirmation has not
been received by the shareholder, whichever is sooner; to act on instructions
believed to be genuine; to freeze any account and temporarily suspend services
on the account when notice has been received of a dispute between registered
or beneficial account owners or there is reason to believe a fraudulent
transaction may occur; or to otherwise modify the conditions of purchase or
any services at any time.
Purchasing Additional Shares: $1,000 minimum purchase; $100 minimum for
Automatic Asset Builder
By ACH Transfer
Use Tele*Access(registered trademark), PC*Access(registered trademark) or call
Investor Services if you have established electronic transfers using the ACH
network.
By Wire
Call Shareholder Services or use the wire address in "Opening a New Account."
By Mail
__________________________________________________________________________
REGULAR MAIL
T. ROWE PRICE FUNDS
ACCOUNT SERVICES
P.O. BOX 89000
BALTIMORE, MD
21289-1500
o Provide your account number and the fund name on your check.
o Mail the check to us at the address shown at left either with a fund
reinvestment slip or a note indicating the fund and account number in
which you wish to purchase shares.
By Automatic Asset Builder
Fill out the Automatic Asset Builder section on the New Account or Shareholder
Services Form ($100 minimum).
Exchanging and Redeeming Shares
By Phone
__________________________________________________________________________
MAILGRAM, EXPRESS,
REGISTERED, OR
CERTIFIED MAIL
(SEE "OPENING A NEW ACCOUNT.")
Call Shareholder Services. If you find our phones busy during unusually
volatile markets, please consider placing your order by Tele*Access(registered
trademark), PC*Access(registered trademark) (if you have previously authorized
telephone services), mailgram or by express mail. For exchange policies,
please see "Transaction Procedures and Special Requirements - Excessive
Trading."
Redemption proceeds can be mailed to your account address, sent by ACH
transfer, or wired to your bank (provided your bank information is already on
file). For charges, see "Electronic Transfers - By Wire" under "Shareholder
Services."
By Mail
__________________________________________________________________________
REGULAR MAIL
T. ROWE PRICE
ACCOUNT SERVICES
P.O. BOX 89000
BALTIMORE, MD
21289-0220
Provide account name(s) and numbers, fund name(s), and exchange or redemption
amount. For exchanges, mail to the appropriate address below or at left,
indicate the fund you are exchanging from and the fund(s) you are exchanging
into. T. Rowe Price requires the signatures of all owners exactly as
registered, and possibly a signature guarantee (see "Transaction Procedures
and Special Requirements-Signature Guarantees").
Shareholder Services
__________________________________________________________________________
SHAREHOLDER SERVICES
1-800-225-5132
1-410-625-6500
Many services are available to you as a T. Rowe Price shareholder; some you
receive automatically and others you must authorize on the New Account Form.
By signing up for services on the New Account Form rather than later, you
avoid having to complete a separate form and obtain a signature guarantee.
This section reviews some of the principal services currently offered. Our
Services Guide contains detailed descriptions of these and other services. If
you are a new T. Rowe Price investor, you will receive a Services Guide with
our Welcome Kit. Note: Corporate and other institutional accounts require an
original or certified resolution to establish services and to redeem by mail.
For more information, call Investor Services.
Exchange Service
__________________________________________________________________________
INVESTOR SERVICES
1-800-638-5660
1-410-547-2308
You can move money from one account to an existing identically registered
account, or open a new identically registered account. Remember, exchanges are
purchases and sales for tax purposes. (Exchanges into a state tax-free fund
are limited to investors living in states where the funds are registered.)
Some of the T. Rowe Price funds may impose a redemption fee of .50% to 2%,
payable to such funds, on shares held for less than one year, or in some
funds, six months.
Automated Services
Tele*Access(registered trademark). 24-hour service via toll-free number
provides information on fund yields and prices, dividends, account balances,
and your latest transaction as well as the ability to request prospectuses,
account and tax forms, duplicate statements, checks, and to initiate purchase,
redemption and exchange orders in your accounts (see "Electronic Transfers"
below).
PC*Access(registered trademark). 24-hour service via dial-up modem provides
the same information as Tele*Access(registered trademark), but on a personal
computer. Please call Investor Services for an information guide.
Telephone and Walk-In Services
Buy, sell, or exchange shares by calling one of our service representatives or
by visiting one of our four investor center locations whose addresses are
listed on the cover.
Electronic Transfers
By ACH. With no charges to pay, you can initiate a purchase or redemption for
as little as $100 or as much as $100,000 between your bank account and fund
account using the ACH network. Enter instructions via Tele*Access(registered
trademark), PC*Access(registered trademark) or call Shareholder Services.
By Wire. Electronic transfers can also be conducted via bank wire. There is
currently a $5 fee for wire redemptions under $5,000, and your bank may charge
for incoming or outgoing wire transfers regardless of size.
Checkwriting (Not available for Equity Funds, High Yield, and Emerging Markets
Bond Funds)
You may write an unlimited number of free checks on any money market funds,
and most bond funds, with a minimum of $500 per check. Keep in mind, however
that a check results in a redemption; a check written on a bond fund will
create a taxable event which you and we must report to the IRS.
Automatic Investing ($100 minimum)
You can invest automatically in several different ways, including:
o Automatic Asset Builder. You instruct us to move $100 or more once a
month or less often from your bank account, or you can instruct your
employer to send all or a portion of your paycheck to the fund or funds
you designate.
o Automatic Exchange. You can set up systematic investments from one fund
account into another, such as from a money fund into a stock fund.
Discount Brokerage
You can trade stocks, bonds, options, precious metals, and other securities at
a savings over regular commission rates. Call Investor Services for
information.
Note: If you buy or sell T. Rowe Price Funds through anyone other than T. Rowe
Price, such as broker-dealers or banks, you may be charged transaction or
service fees by those institutions. No such fees are charged by T. Rowe Price
Investment Services or the fund for transactions conducted directly with the
fund.
______________________________________________________________________________
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 SUMMIT MUNICIPAL FUNDS, INC.
T. Rowe Price Summit Municipal Money Market Fund
T. Rowe Price Summit Municipal Intermediate-Term Fund
T. Rowe Price Summit Municipal Income Fund
(the "Funds")
This Statement of Additional Information is not a
prospectus but should be read in conjunction with the Funds'
prospectus dated March 1, 1995, 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
March 1, 1995.
PAGE 3
TABLE OF CONTENTS
Page Page
Capital Stock . . . . . . . . Options . . . . . . . . .
Code of Ethics . . . . . . . Participation Interests .
Custodian . . . . . . . . . . Portfolio Management
Determination of Maturity Practices . . . . . . . .
of Securities . . . . . . . Portfolio Transactions . .
Distributor for Funds . . . . Pricing of Securities . .
Dividends . . . . . . . . . . Principal Holders of
Federal and State Securities . . . . . . .
Regulation of Shares . . . . Ratings of Commercial
Forwards . . . . . . . . . . Paper . . . . . . . . . .
Futures Contracts . . . . . . Ratings of Municipal Debt
Independent Accountants . . . Securities . . . . . . .
Investment Management Ratings of Municipal Notes
Services . . . . . . . . . . and Variable Rate
Investment in Taxable Money Securities . . . . . . .
Market Securities . . . . . Residual Interest
Investment Objectives and Bonds . . . . . . . . . .
Policies . . . . . . . . . . Risk Factors . . . . . . .
Investment Performance . . . Tax-Exempt vs. Taxable
Investment Programs . . . . . Yields . . . . . . . . .
Legal Counsel . . . . . . . . Tax Status . . . . . . . .
Management of Funds . . . . . Variable and Floating
Municipal Securities . . . . Rate Securities . . . . .
Net Asset Value Per When-Issued Securities . .
Share . . . . . . . . . . . Yield Information . . . .
INVESTMENT OBJECTIVES AND POLICIES
The following information supplements the discussion of the
Fund's investment objectives and policies discussed in the
prospectus. The Funds will not make a material change in their
investment objectives without obtaining shareholder approval.
Unless otherwise specified, the investment programs and
restrictions of the Funds are not fundamental policies. Each
Fund's operating policies 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.
Each Fund's fundamental policies 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.
PAGE 4
INVESTMENT OBJECTIVES AND PROGRAM
T. Rowe Price Summit Money Fund -- The objectives of the
Fund are preservation of capital, liquidity, and, consistent with
these, the highest possible current income exempt from federal
income taxes. An investment in the Fund is neither insured nor
guaranteed by the U.S. government and there can be no assurance
that the Fund will be able to maintain a stable net asset value
of $1.00 per share.
T. Rowe Price Summit Intermediate Fund -- The objective of
the Fund is to provide the highest possible income exempt from
federal income taxes consistent with moderate price fluctuation.
T. Rowe Price Summit Income Fund -- The objective of the
Fund is to provided a high level of income exempt from federal
income taxes.
RISK FACTORS
All Funds
There can be no assurance that the Funds will achieve their
investment objectives. Yields on municipal securities are
dependent on a variety of factors, including the general
conditions of the money market and the municipal bond market, the
size of a particular offering, the maturity of the obligation,
and the rating of the issue. Municipal securities with longer
maturities tend to produce higher yields and are generally
subject to potentially greater capital appreciation and
depreciation than obligations with shorter maturities and lower
yields. The market prices of municipal securities usually vary,
depending upon available yields. An increase in interest rates
will generally reduce the value of portfolio investments, and a
decline in interest rates will generally increase the value of
portfolio investments. The ability of all the Funds to achieve
their investment objectives is also dependent on the continuing
ability of the issuers of municipal securities in which the Funds
invest to meet their obligations for the payment of interest and
principal when due. The ratings of Moody's, S&P, and Fitch
represent their opinions as to the quality of municipal
securities which they undertake to rate. Ratings are not
absolute standards of quality; consequently, municipal securities
with the same maturity, coupon, and rating may have different
yields. There are variations in municipal securities, both
PAGE 5
within a particular classification and between classifications,
depending on numerous factors. It should also be pointed out
that, unlike other types of investments, municipal securities
have traditionally not been subject to regulation by, or
registration with, the SEC, although there have been proposals
which would provide for regulation in the future.
The federal bankruptcy statutes relating to the debts of
political subdivisions and authorities of states of the United
States provide that, in certain circumstances, such subdivisions
or authorities may be authorized to initiate bankruptcy
proceedings without prior notice to or consent of creditors,
which proceedings could result in material and adverse changes in
the rights of holders of their obligations.
Proposals have been introduced in Congress to restrict or
eliminate the federal income tax exemption for interest on
municipal securities, and similar proposals may be introduced in
the future. Some of the past proposals would have applied to
interest on municipal securities issued before the date of
enactment, which would have adversely affected their value to a
material degree. If such a proposal were enacted, the
availability of municipal securities for investment by the Funds
and the value of a Fund's portfolio would be affected and, in
such an event, a Fund would reevaluate its investment objectives
and policies.
Although the banks and securities dealers with which the
Fund will transact business will be banks and securities dealers
that T. Rowe Price Associates, Inc. ("T. Rowe Price") believes to
be financially sound, there can be no assurance that they will be
able to honor their obligations to the Fund with respect to such
securities.
Municipal Bond Insurance. All of the Funds may purchase
insured bonds from time to time. Municipal bond insurance
provides an unconditional and irrevocable guarantee that the
insured bond's principal and interest will be paid when due. The
guarantee is purchased from a private, non-governmental insurance
company.
There are two types of insured securities that may be
purchased by the Funds, bonds carrying either (1) new issue
insurance or (2) secondary insurance. New issue insurance is
purchased by the issuer of a bond in order to improve the bond's
credit rating. By meeting the insurer's standards and paying an
PAGE 6
insurance premium based on the bond's principal value, the issuer
is able to obtain a higher credit rating for the bond. Once
purchased, municipal bond insurance cannot be cancelled, and the
protection it affords continues as long as the bonds are
outstanding and the insurer remains solvent.
The Funds may also purchase bonds which carry secondary
insurance purchased by an investor after a bond's original
issuance. Such policies insure a security for the remainder of
its term. Generally, the Funds expect that portfolio bonds
carrying secondary insurance will have been insured by a prior
investor. However, the Funds may, on occasion, purchase
secondary insurance on their own behalf.
Each of the municipal bond insurance companies has
established reserves to cover estimated losses. Both the method
of establishing these reserves and the amount of the reserves
vary from company to company. The risk that a municipal bond
insurance company may experience a claim extends over the life of
each insured bond. Municipal bond insurance companies are
obligated to pay a bond's interest and principal when due if the
issuing entity defaults on the insured bond. Although defaults
on insured municipal bonds have been low to date, there is no
assurance this low rate will continue in the future. A higher
than expected default rate could deplete loss reserves and
adversely affect the ability of a municipal bond insurer to pay
claims to holders of insured bonds, such as the Fund.
Reference is also made to the sections entitled "Types of
Securities," and "Portfolio Management Practices," for
discussions of the risks associated with the investments and
practices described therein as they apply to each Fund.
Money Fund
The Fund will limit its purchases of portfolio instruments
to those U.S. dollar-denominated securities which the Fund's
Board of Directors determines present minimal credit risk, and
which are Eligible Securities as defined in Rule 2a-7 under the
Investment Company Act of 1940 (1940 Act). Eligible Securities
are generally securities which have been rated (or whose issuer
has been rated or whose issuer has comparable securities rated)
in one of the two highest rating categories by nationally
recognized statistical rating organizations or, in the case of
any instrument that is not so rated, is of comparable high
quality as determined by T. Rowe Price pursuant to written
guidelines established in accordance with Rule 2a-7 under the
PAGE 7
Investment Company Act of 1940 under the supervision of the
Fund's Board of Directors. In addition, the Funds may treat
variable and floating rate instruments with demand features as
short-term securities pursuant to Rule 2a-7 under the 1940 Act.
There can be no assurance that the Money Fund will achieve
its investment objectives or be able to maintain its net asset
value per share at $1.00. The price stability and liquidity of
the Money Fund may not be equal to that of a taxable money market
fund which exclusively invests in short-term taxable money market
securities. The taxable money market is a broader and more
liquid market with a greater number of investors, issuers, and
market makers than the short-term municipal securities market.
The weighted average maturity of the Fund varies: the shorter
the average maturity of a portfolio, the less its price will be
impacted by interest rate fluctuations.
Intermediate and Income Funds
Because of their investment policies, the Intermediate and
Income Funds may not be suitable or appropriate for all
investors. The Funds are designed for investors who wish to
invest long-term funds for income, and who would benefit, because
of their tax bracket, from receiving income that is exempt from
federal income taxes. The Intermediate and Income Funds'
investment programs permit the purchase of investment grade
securities that do not meet the high quality standards of the
Money Fund. Since investors generally perceive that there are
greater risks associated with investment in lower quality
securities, the yields from such securities normally exceed those
obtainable from higher quality securities. In addition, the
principal value of long term lower-rated securities generally
will fluctuate more widely than higher quality securities. Lower
quality investments entail a higher risk of default--that is, the
nonpayment of interest and principal by the issuer than higher
quality investments. The value of the portfolio securities of
the Intermediate and Income Funds will fluctuate based upon
market conditions. Although these Funds seek to reduce credit
risk by investing in a diversified portfolio, such
diversification does not eliminate all risk. These Funds are
also not intended to provide a vehicle for short-term trading
purposes.
Special Risks of High Yield Investing (Intermediate and
Income Funds). The Intermediate and Income Funds may invest up
to 10% and 20%, respectively of their total assets in low quality
bonds commonly referred to as "junk bonds." Junk bonds are
PAGE 8
regarded as predominantly speculative with respect to the
issuer's continuing ability to meet principal and interest
payments. Because investment in low and lower-medium quality
bonds involves greater investment risk, to the extent the Funds
invest in such bonds, achievement of their investment objectives
will be more dependent on T. Rowe Price's credit analysis than
would be the case if the Fund were investing in higher quality
bonds. High yield bonds may be more susceptible to real or
perceived adverse economic conditions than investment grade
bonds. A projection of an economic downturn, or higher interest
rates, for example, could cause a decline in high yield bond
prices because the advent of such events could lessen the ability
of highly leverage issuers to make principal and interest
payments on their debt securities. In addition, the secondary
trading market for high yield bonds may be less liquid than the
market for higher grade bonds, which can adversely affect the
ability of a Fund to dispose of its portfolio securities. Bonds
for which there is only a "thin" market can be more difficult to
value inasmuch as objective pricing data may be less available
and judgment may play a greater role in the valuation process.
INVESTMENT PROGRAMS
(Throughout the discussion on Investments, the term "the Fund" is
intended to refer to each of the Funds eligible to invest in the
security or engage in the practice being described)
Type of Securities
Municipal Securities
Subject to the investment objectives and programs described
in the prospectus and the additional investment restrictions
described in this Statement of Additional Information, each
Fund's portfolio may consist of any combination of the various
types of municipal securities described below or other types of
municipal securities that may be developed. The amount of each
Fund's assets invested in any particular type of municipal
security can be expected to vary.
The term "municipal securities" means obligations issued by
or on behalf of states, territories, and possessions of the
United States and the District of Columbia and their political
subdivisions, agencies and instrumentalities, as well as certain
other persons and entities, the interest from which is exempt
PAGE 9
from federal income tax. In determining the tax-exempt status of
a municipal security, the Fund relies on the opinion of the
issuer's bond counsel at the time of the issuance of the
security. However, it is possible this opinion could be
overturned, and as a result, the interest received by the Fund
from such a security might not be exempt from federal income tax.
Municipal securities are classified by maturity as notes,
bonds, or adjustable rate securities.
Municipal Notes. Municipal notes generally are used to
provide for short-term operating or capital needs and generally
have maturities of one year or less. Municipal notes include:
Tax Anticipation Notes. Tax anticipation notes are issued
to finance working capital needs of municipalities.
Generally, they are issued in anticipation of various
seasonal tax revenue, such as income, property, use and
business taxes, and are payable from these specific future
taxes.
Revenue Anticipation Notes. Revenue anticipation notes are
issued in expectation of receipt of other types of revenue,
such as federal or state revenues available under the
revenue sharing or grant programs.
Bond Anticipation Notes. Bond anticipation notes are issued
to provide interim financing until long-term financing can
be arranged. In most cases, the long-term bonds then
provide the money for the repayment of the notes.
Tax-Exempt Commercial Paper. Tax-exempt commercial paper is
a short-term obligation with a stated maturity of 270 days
or less. It is issued by state and local governments or
their agencies to finance seasonal working capital needs or
as short-term financing in anticipation of longer term
financing.
Municipal Bonds. Municipal bonds, which meet longer term
capital needs and generally have maturities of more than one year
when issued, have two principal classifications: general
obligation bonds and revenue bonds. Two additional categories of
potential purchases are lease revenue bonds and pre-
refunded/escrowed to maturity bonds. Another type of municipal
bond is referred to as an Industrial Development Bond.
PAGE 10
General Obligation Bonds. Issuers of general obligation
bonds include states, counties, cities, towns, and special
districts. The proceeds of these obligations are used to
fund a wide range of public projects, including construction
or improvement of schools, public buildings, highways and
roads, and general projects not supported by user fees or
specifically identified revenues. The basic security behind
general obligation bonds is the issuer's pledge of its full
faith and credit and taxing power for the payment of
principal and interest. The taxes that can be levied for
the payment of debt service may be limited or unlimited as
to the rate or amount of special assessments. In many cases
voter approval is required before an issuer may sell this
type of bond.
Revenue Bonds. The principal security for a revenue bond is
generally the net revenues derived from a particular
facility, or enterprise, or in some cases, the proceeds of a
special charge or other pledged revenue source. Revenue
bonds are issued to finance a wide variety of capital
projects including: electric, gas, water and sewer systems;
highways, bridges, and tunnels; port and airport facilities;
colleges and universities; and hospitals. Revenue bonds are
sometimes used to finance various privately operated
facilities provided they meet certain tests established for
tax-exempt status.
Although the principal security behind these bonds
may vary, many provide additional security in the form
of a mortgage or debt service reserve fund. Some
authorities provide further security in the form of the
state's ability (without obligation) to make up
deficiencies in the debt service reserve fund. Revenue
bonds usually do not require prior voter approval
before they may be issued.
Lease Revenue Bonds. Municipal borrowers may also
finance capital improvements or purchases with
tax-exempt leases. The security for a lease is
generally the borrower's pledge to make annual
appropriations for lease payments. The lease payment
is treated as an operating expense subject to
appropriation risk and not a full faith and credit
obligation of the issuer. Lease revenue bonds are
generally considered less secure than a general
obligation or revenue bond and often do not include a
debt service reserve fund. To the extent the Fund's
PAGE 11
Board determines such securities are illiquid, they
will be subject to the Fund's limit on illiquid
securities. There have also been certain legal
challenges to the use of lease revenue bonds in various
states.
The liquidity of such securities will be determined
based on a variety of factors which may include, among
others: (1) the frequency of trades and quotes for the
obligation; (2) the number of dealers willing to
purchase or sell the security and the number of other
potential buyers; (3) the willingness of dealers to
undertake to make a market in the security; (4) the
nature of the marketplace trades, including, the time
needed to dispose of the security, the method of
soliciting offers, and the mechanics of transfer; and
(5) the rating assigned to the obligation by an
established rating agency or T. Rowe Price.
Each Fund does not expect to invest more than 20% of
its total assets in these securities.
Pre-refunded/Escrowed to Maturity Bonds. Certain
municipal bonds have been refunded with a later bond
issue from the same issuer. The proceeds from the
later issue are used to defease the original issue. In
many cases the original issue cannot be redeemed or
repaid until the first call date or original maturity
date. In these cases, the refunding bond proceeds
typically are used to buy U.S. Treasury securities that
are held in an escrow account until the original call
date or maturity date. The original bonds then become
"pre-refunded" or "escrowed to maturity" and are
considered as high quality investments. While still
tax-exempt, the security is the proceeds of the escrow
account. To the extent permitted by the Securities and
Exchange Commission and the Internal Revenue Service, a
Fund's investment in such securities refunded with U.S.
Treasury securities will, for purposes of
diversification rules applicable to the Fund, be
considered as an investment in the U.S. Treasury
securities.
Private Activity Bonds. Under current tax law all
municipal debt is divided broadly into two groups:
governmental purpose bonds and private activity bonds.
Governmental purpose bonds are issued to finance
PAGE 12
traditional public purpose projects such as public
buildings and roads. Private activity bonds may be
issued by a state or local government or public
authority but principally benefit private users and are
considered taxable unless a specific exemption is
provided.
The tax code currently provides exemptions for
certain private activity bonds such as not-for-profit
hospital bonds, small-issue industrial development
revenue bonds and mortgage subsidy bonds, which may
still be issued as tax-exempt bonds. Some, but not
all, private activity bonds are subject to alternative
minimum tax.
Industrial Development Bonds. Industrial development
bonds are considered Municipal Bonds if the interest
paid is exempt from federal income tax. They are
issued by or on behalf of public authorities to raise
money to finance various privately operated facilities
for business and manufacturing, housing, sports, and
pollution control. These bonds are also used to
finance public facilities such as airports, mass
transit systems, ports, and parking. The payment of the
principal and interest on such bonds is dependent
solely on the ability of the facility's user to meet
its financial obligations and the pledge, if any, of
real and personal property so financed as security for
such payment.
Adjustable Rate Securities. Municipal securities may
be issued with adjustable interest rates that are reset
periodically by pre-determined formulas or indexes in order to
minimize movements in the principal value of the investment.
Such securities may have long-term maturities, but may be treated
as a short-term investment under certain conditions. Generally,
as interest rates decrease or increase, the potential for capital
appreciation or depreciation on these securities is less than for
fixed-rate obligations. These securities may take the following
forms:
Variable Rate Securities. Variable rate
instruments are those whose terms provide for the
adjustment of their interest rates on set dates and
which, upon such adjustment, can reasonably be
expected to have a market value that approximates
its par value. Subject to the provisions of Rule
PAGE 13
2a-7 under the Investment Company Act of 1940, (1)
a variable rate instrument, the principal amount of
which is scheduled to be paid in 397 days or less,
is deemed to have a maturity equal to the period
remaining until the next readjustment of the
interest; (2) a variable rate instrument which is
subject to a demand feature which entitles the
purchaser to receive the principal amount of the
underlying security or securities either (i) upon
notice of usually 30 days, or (ii), at specified
intervals not exceeding 397 days and upon no more
than 30 days notice is deemed to have a maturity
equal to the longer of the period remaining until
the next readjustment of the interest rate or the
period remaining until the principal amount can be
recovered through demand; and (3) an instrument
that is issued or guaranteed by the U.S. government
or any agency thereof which has a variable rate of
interest readjusted no less frequently than every
762 days may be deemed to have a maturity equal to
the period remaining until the next readjustment of
the interest rate. Should the provisions of Rule
2a-7 change, the Funds will determine the maturity
of these securities in accordance with the amended
provisions of such rule.
Floating Rate Securities. Floating rate
instruments are those whose terms provide for the
adjustment of their interest rates whenever a
specified interest rate changes and which, at any
time, can reasonably be expected to have a market
value that approximates its par value. Subject to
the provisions of Rule 2a-7 under the Investment
Company Act of 1940, (1) the maturity of a floating
rate instrument is deemed to be the period
remaining until the date (noted on the face of the
instrument) on which the principal amount must be
paid, or in the case of an instrument called for
redemption, the date on which the redemption
payment must be made; and (2) floating rate
instruments with demand features are deemed to have
a maturity equal to the period remaining until the
principal amount can be recovered through demand.
Should the provisions of Rule 2a-7 change, the
Funds will determine the maturity of these
securities in accordance with the amended
provisions of such rule.
PAGE 14
Put Option Bonds. Long-term obligations with
maturities longer than one year may provide
purchasers an optional or mandatory tender of the
security at par value at predetermined intervals,
often ranging from one month to several years
(e.g., a 30-year bond with a five-year tender
period). These instruments are deemed to have a
maturity equal to the period remaining to the put
date.
Residual Interest Bonds (Intermediate and Income
Funds). The Funds may purchase municipal bond
issues that are structured as two-part, residual
interest bond and variable rate security offerings.
The issuer is obligated only to pay a fixed amount
of tax-free income that is to be divided among the
holders of the two securities. The interest rate
for the holders of the variable rate securities
will be determined by an index or auction process
held approximately every 7 to 35 days while the
bond holders will receive all interest paid by the
issuer minus the amount given to the variable rate
security holders and a nominal auction fee.
Therefore, the coupon of the residual interest
bonds, and thus the income received, will move
inversely with respect to short-term, 7 to 35 day
tax-exempt interest rates. There is no assurance
that the auction will be successful and that the
variable rate security will provide short-term
liquidity. The issuer is not obligated to provide
such liquidity. In general, these securities offer
a significant yield advantage over standard
municipal securities, due to the uncertainty of the
shape of the yield curve (i.e., short term versus
long term rates) and consequent income flows.
Unlike many adjustable rate securities, residual
interest bonds are not necessarily expected to
trade at par and in fact present significant market
risks. In certain market environments, residual
interest bonds may carry substantial premiums or be
at deep discounts. This is a relatively new
product in the municipal market with limited
liquidity to date.
PAGE 15
Each Fund will not invest more than 5% of its
total assets in these instruments.
Participation Interests. The Funds may purchase
from third parties participation interests in all
or part of specific holdings of municipal
securities. The purchase may take different forms:
in the case of short-term securities, the
participation may be backed by a liquidity facility
that allows the interest to be sold back to the
third party (such as a trust, broker or bank) for a
predetermined price of par at stated intervals.
The seller may receive a fee from the Funds in
connection with the arrangement.
In the case of longer term bonds, the
Intermediate and Income Funds may purchase
interests in a pool of municipal bonds or a single
municipal bond or lease without the right to sell
the interest back to the third party.
The Funds will not purchase participation
interests unless a satisfactory opinion of counsel
or ruling of the Internal Revenue Service has been
issued that the interest earned from the municipal
securities on which the Funds holds participation
interests is exempt from federal income tax to the
Funds. However, there is no guarantee the IRS
would treat such interest income as tax-exempt.
Each Fund will not invest more than 5% of its
total assets in these instruments.
Embedded Interest Rate Swaps and Caps (Intermediate
and Income Funds). In a fixed-rate, long-term
municipal bond with an interest rate swap attached
to it, the bondholder usually receives the bond's
fixed-coupon payment as well as a variable rate
payment that represents the difference between a
fixed rate for the term of the swap (which is
typically shorter than the bond it is attached to)
and a variable rate short-term municipal index. The
bondholder receives excess income when short-term
rates remain below the fixed interest rate swap
rate. If short-term rates rise above the
fixed-income swap rate, the bondholder's income is
PAGE 16
reduced. At the end of the interest rate swap term,
the bond reverts to a single fixed-coupon payment.
Embedded interest rate swaps enhance yields, but
also increase interest rate risk.
An embedded interest rate cap allows the
bondholder to receive payments whenever short-term
rates rise above a level established at the time of
purchase. They normally are used to hedge against
rising short-term interest rates.
Both instruments may be volatile and of limited
liquidity and their use may adversely affect a
fund's total return.
Each Fund will not invest more than 5% of its
total assets in these instruments.
The Funds may invest in other types of derivative
instruments as they become available.
There are, of course, other types of municipal
securities that are, or may become, available, and the Funds
reserve the right to invest in them.
For the purpose of the Funds' investment restrictions,
the identification of the "issuer" of municipal securities which
are not general obligation bonds is made by the Funds' investment
manager, T. Rowe Price, on the basis of the characteristics of
the obligation as described above, the most significant of which
is the source of funds for the payment of principal and interest
on such securities.
When-Issued Securities
New issues of municipal securities are often offered on
a when-issued basis; that is, delivery and payment for the
securities normally takes place 15 to 45 days or more after the
date of the commitment to purchase. The payment obligation and
the interest rate that will be received on the securities are
each fixed at the time the buyer enters into the commitment. A
Fund will only make a commitment to purchase such securities with
the intention of actually acquiring the securities. However, a
Fund may sell these securities before the settlement date if it
is deemed advisable as a matter of investment strategy. Each
Fund will maintain cash and/or high-grade marketable debt
securities with its custodian bank equal in value to commitments
PAGE 17
for when-issued securities. Such securities either will mature
or, if necessary, be sold on or before the settlement date.
Securities purchased on a when-issued basis and the securities
held in a Fund's portfolio are subject to changes in market value
based upon the public perception of the creditworthiness of the
issuer and changes in the level of interest rates (which will
generally result in similar changes in value; i.e., both
experiencing appreciation when interest rates decline and
depreciation when interest rates rise). Therefore, to the extent
a Fund remains fully invested or almost fully invested at the
same time that it has purchased securities on a when-issued
basis, there will be greater fluctuations in its net asset value
than if it solely set aside cash to pay for when-issued
securities. In the case of the Money Fund, this could increase
the possibility that the market value of the Fund's assets could
vary from $1.00 per share. In addition, there will be a greater
potential for the realization of capital gains, which are not
exempt from federal income tax. When the time comes to pay for
when-issued securities, a Fund will meet its obligations from
then-available cash flow, sale of securities or, although it
would not normally expect to do so, from sale of the when-issued
securities themselves (which may have a value greater or less
than the payment obligation). The policies described in this
paragraph are not fundamental and may be changed by a Fund upon
notice to its shareholders.
Forwards
(Intermediate and Income Funds)
The Funds may purchase bonds on a when-issued basis
with longer than standard settlement dates, in some cases
exceeding one to two years. In such cases, the Funds must
execute a receipt evidencing the obligation to purchase the bond
on the specified issue date, and must segregate cash internally
to meet that forward commitment. Municipal "forwards" typically
carry a substantial yield premium to compensate the buyer for the
risks associated with a long when-issued period, including:
shifts in market interest rates that could materially impact the
principal value of the bond, deterioration in the credit quality
of the issuer, loss of alternative investment options during the
when-issued period, changes in tax law or issuer actions that
would affect the exempt interest status of the bonds and prevent
delivery, failure of the issuer to complete various steps
required to issue the bonds, and limited liquidity for the buyer
to sell the escrow receipts during the when-issued period.
PAGE 18
Investment in Taxable Money Market Securities
Although the Funds expect to be solely invested in
municipal securities, for temporary defensive purposes they may
elect to invest in the taxable money market securities listed
below (without limitation) when such action is deemed to be in
the best interests of shareholders. The interest earned on these
money market securities is not exempt from federal income tax and
may be taxable to shareholders as ordinary income.
U.S. Government Obligations - direct obligations of
the government and its agencies and instrumentalities;
U.S. Government Agency Securities - obligations
issued or guaranteed by U.S. government sponsored enterprises,
federal agencies, and international institutions. Some of these
securities are supported by the full faith and credit of the U.S.
Treasury; others are supported by the right of the issuer; and
the remainder are supported only by the credit of the
instrumentality;
Bank Obligations - certificates of deposit,
bankers' acceptances, and other short-term obligations of U.S.
and Canadian banks and their foreign branches;
Commercial Paper - paper rated A-2 or better by
S&P, Prime-2 or better by Moody's, or F-2 or better by Fitch, or,
if not rated, is issued by a corporation having an outstanding
debt issue rated A or better by Moody's, S&P or Fitch and, with
respect to the Money Fund, is of equivalent investment quality as
determined by the Board of Directors; and
Short-Term Corporate Debt Securities - short-term
corporate debt securities rated at least AA by S&P, Moody's or
Fitch.
Determination of Maturity of Money Market Securities
The Money Fund may only purchase securities which at
the time of investment have remaining maturities of 397 calendar
days or less, or with respect to U.S. government securities, have
remaining maturities of 762 calendar days or less. The other
Funds may also purchase money-market securities. In determining
the maturity of money market securities, Funds will follow the
provisions of Rule 2a-7 under the Investment Company Act of 1940.
PAGE 19
Futures Contracts
Futures contracts are a type of potentially high
risk derivative.
Intermediate and Income Funds
Transactions in Futures
The Fund may enter into interest rate futures contracts
("futures" or "futures contracts"). Interest rate futures
contracts may be used as a hedge against changes in prevailing
levels of interest rates in order to establish more definitely
the effective return on securities held or intended to be
acquired by the Fund. The Fund could sell interest rate futures
as an offset against the effect of expected increases in interest
rates and purchase such futures as an offset against the effect
of expected declines in interest rates. Futures can also be used
as an efficient means of regulating a Fund's exposure to the
market.
The Fund will enter into futures contracts which are
traded on national futures exchanges and are standardized as to
maturity date and underlying financial instrument. A public
market exists in futures contracts covering various taxable fixed
income securities as well as municipal bonds. Futures exchanges
and trading in the United States are regulated under the
Commodity Exchange Act by the Commodity Futures Trading
Commission ("CFTC"). 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 futures contracts and options
thereon only for bona fide hedging, yield enhancement, and risk
management purposes, in each case in accordance with rules and
regulations of the CFTC and applicable state law.
The Fund may not purchase or sell futures contracts or
related options if, with respect to positions which do not
quality as bona fide hedging under applicable CFTC rules, the sum
of the amounts of initial margin deposits and premiums paid on
those positions would exceed 5% of the net asset value of the
Fund after taking into account unrealized profits and unrealized
PAGE 20
losses on any such contracts it has entered into; 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. For purposes of this policy,
options on futures contracts traded on a commodities exchange
will be considered "related options." This policy may be
modified by the Board of Directors without a shareholder vote and
does not limit the percentage of the Fund's assets at risk to 5%.
In accordance with the rules of the State of
California, the Fund will apply the above 5% test without
excluding the value of initial margin and premiums paid for bona
fide hedging purposes.
The Fund's use of futures will not result in leverage.
Therefore, to the extent necessary, in instances involving the
purchase of futures contracts or the writing of calls or 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 identified in an
account with the Fund's custodian to cover the position, or
alternative cover (such as owning an offsetting position) will be
employed. Assets used as cover or held in an identified account
cannot be sold while the position in the corresponding option or
future is open, unless they are replaced with similar assets. As
a result, the commitment of a large portion of a Fund's assets to
cover or identified accounts could impede portfolio management or
the Fund's ability to meet redemption requests or other current
obligations.
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 Contracts
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 debt security)
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.
PAGE 21
It is possible that the Fund's hedging activities will
occur primarily through the use of municipal bond index futures
contracts since the uniqueness of that index contract should
better correlate with the Fund's portfolio and thereby be more
effective. However, there may be times when it is deemed in the
best interest of shareholders to engage in the use of Treasury
bond futures, and the Fund reserves to right to use Treasury bond
futures at any time. Use of these futures could occur, as an
example, when both the Treasury bond contract and municipal bond
index futures contract are correlating well with municipal bond
prices, but the Treasury bond contract is trading at a more
advantageous price making the hedge less expensive with the
Treasury bond contract than would be obtained with the municipal
bond index futures contract. The Fund's activity in futures
contracts generally will be limited to municipal bond index
futures contracts and Treasury bond and note contracts.
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
PAGE 22
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 sale or purchase 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.
As an example of an offsetting transaction in which the
underlying instrument is not delivered, the contractual
obligations arising from the sale of one contract of September
municipal bond index futures on an exchange may be fulfilled at
any time before delivery of the contract is required (i.e., on a
specified date in September, the "delivery month") by the
purchase of one contract of September municipal bond index
futures on the same exchange. In such instance, the difference
between the price at which the futures contract was sold and the
price paid for the offsetting purchase, after allowance for
transaction costs, represents the profit or loss to the Fund.
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 political 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
PAGE 23
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 financial 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 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.
PAGE 24
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 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.
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
instruments underlying 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
PAGE 25
as the market indices used to hedge the portfolios. 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
The Fund might trade in municipal bond index option
futures or similar options on futures developed in the future.
In addition, the Fund may also trade in options on futures
contracts on U.S. government securities and any U.S. government
securities futures index contract which might be developed. In
the opinion of T. Rowe Price, there is a high degree of
PAGE 26
correlation in the interest rate, and price movements of U.S.
government securities and municipal securities. However, the
U.S. government securities market and municipal securities
markets are independent and may not move in tandem at any point
in time.
The Fund will purchase put options on futures contracts
to hedge its portfolio of municipal securities against the risk
of rising interest rates, and the consequent decline in the
prices of the municipal securities it owns. The Funds will also
write call options on futures contracts as a hedge against a
modest decline in prices of the municipal securities held in the
Fund's portfolio. If the futures price at expiration of a
written call option is below the exercise price, the Fund will
retain the full amount of the option premium, thereby partially
hedging against any decline that may have occurred in the Fund's
holdings of debt securities. If the futures price when the
option is exercised is above the exercise price, however, the
Fund will incur a loss, which may be wholly or partially offset
by the increase of the value of the securities in the Fund's
portfolio which were being hedged.
Writing a put option on a futures contract serves as a
partial hedge against an increase in the value of securities the
Fund intends to acquire. If the futures price at expiration of
the option is above the exercise price, the Fund will retain the
full amount of the option premium which provides a partial hedge
against any increase that may have occurred in the price of the
debt securities the Fund intends to acquire. If the futures
price when the option is exercised is below the exercise price,
however, the Fund will incur a loss, which may be wholly or
partially offset by the decrease in the price of the securities
the Fund intends to acquire.
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
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
PAGE 27
price of the option on the futures contract. Purchasers of
options who fail to exercise their options prior to the exercise
date suffer a loss of the premium paid.
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 risks described under "Special Risks of
Transactions on Futures Contracts" are substantially the same as
the risks of using options on futures. In addition, where the
Fund seeks to close out an option position by writing or buying
an offsetting option covering the same index, underlying
instrument or contract and having the same exercise price and
expiration date, its 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. In the event no such market exists for a
particular contract in which the Fund maintains a position, in
PAGE 28
the case of a written option, the Fund would have to wait to sell
the underlying securities or futures positions until the option
expires or is exercised. The Fund would be required to maintain
margin deposits on payments until the contract is closed.
Options on futures are treated for accounting purposes in the
same way as the analogous option on securities are treated.
In addition, the correlation between movements in the
price of options on futures contracts and movements in the price
of the securities hedged can only be approximate. This risk is
significantly increased when an option on a U.S. government
securities future or an option on a municipal securities index
future is used to hedge a municipal bond portfolio. Another risk
is that the movements in the price of options on futures
contracts may not move inversely with changes in interest rates.
If the Fund has written a call option on a futures contract and
the value of the call increases by more than the increase in the
value of the securities held as cover, the Fund may realize a
loss on the call which is not completely offset by the
appreciation in the price of the securities held as cover and the
premium received for writing the call.
The successful use of options on futures contracts
requires special expertise and techniques different from those
involved in portfolio securities transactions. 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 or interest rate trends.
During periods when municipal securities market prices are
appreciating, the Fund may experience poorer overall performance
than if it had not entered into any options on futures contracts.
General Considerations
Transactions by the Fund in options on futures will be
subject to limitations established by each of the exchanges,
boards of trade or other trading facilities governing the maximum
number of options in each class which may be written or purchased
by a single investor or group of investors acting in concert,
regardless of whether the options are written on the same or
different exchanges, boards of trade or other trading facilities
or are held or written in one or more accounts or through one or
more brokers. Thus, the number of contracts which the Fund may
write or purchase may be affected by contracts written or
purchased by other investment advisory clients of T. Rowe Price.
An exchange, board of trade or other trading facility may order
PAGE 29
the liquidations of positions found to be in excess of these
limits, and it may impose certain other sanctions.
Additional Futures and Options Contracts
Although the Funds have no current intention of
engaging in futures or options transactions other than those
described above, they reserve the right to do so. Such futures
and options trading might involve risks which differ from those
involved in the futures and options described above.
Federal Tax Treatment of Futures Contracts
Although the Fund invests almost exclusively in
securities which generate income which is exempt from federal
income taxes, the instruments described above are not exempt from
such taxes. Therefore, use of the investment techniques
described above could result in taxable income to shareholders of
the Fund.
Generally, the Fund is required, for federal income tax
purposes, to recognize as income for each taxable year its net
unrealized gains and losses on futures contracts as of the end of
the year as well as those actually realized during the year.
Gain or loss recognized with respect to a futures contract will
generally be 60% long-term capital gain or loss and 40% short-
term capital gain or loss, without regard to the holding period
of the contract.
Futures contracts which are intended to hedge against a
change in the value of securities may be classified as "mixed
straddles," in which case the recognition of losses may be
deferred to a later year. In addition, sales of such futures
contracts on securities may affect the holding period of the
hedged security and, consequently, the nature of the gain or loss
on such security on disposition.
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 income; i.e., dividends, interest, income
derived from loans of securities, and gains from the sale of
securities. Gains realized on the sale or other disposition of
securities, including futures contracts on securities 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 held less than three months, the
PAGE 30
Fund may be required to defer the closing out of futures
contracts beyond the time when it would otherwise be advantageous
to do so. It is anticipated that unrealized gains on futures
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 held
less than three months for purposes of the 30% test.
The Fund will distribute to shareholders annually any
net gains which have been recognized for federal income tax
purposes from futures transactions (including unrealized gains at
the end of the Fund's fiscal year). Such distributions will be
combined with distributions of ordinary income or capital gains
realized on the Fund's other investments. Shareholders will be
advised of the nature of the payments. The Fund's ability to
enter into transactions in options on futures contracts may be
limited by the Internal Revenue Code's requirements for
qualification as a regulated investment company.
Options on Securities
Options are another type of potentially high risk
derivative.
Intermediate and Income Funds
The Funds have no current intention of investing in
options on securities, although they reserve the right to do so.
Appropriate disclosure would be added to the Funds' prospectus
and Statement of Additional Information when and if the Funds
decide to invest in options.
INVESTMENT RESTRICTIONS
All Funds
Fundamental policies may not be changed without the
approval of the lesser of (1) 67% of a 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 a Fund's outstanding shares. Other restrictions in
the form of operating policies are subject to change by a 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,
PAGE 31
an acquisition of securities or assets of, or borrowings by, a
Fund.
Fundamental Policies
As a matter of fundamental policy, the Funds may not:
(1) Borrowing. Borrow money except that the Fund may
(i) borrow for non-leveraging, temporary or
emergency purposes and (ii) engage in reverse
repurchase agreements and make other investments
or engage in other transactions, which may involve
a borrowing, in a manner consistent with the
Fund's investment objective and program, provided
that the combination of (i) and (ii) shall not
exceed 33 1/3% of the value of the Fund's total
assets (including the amount borrowed) less
liabilities (other than borrowings) or such other
percentage permitted by law. Any borrowings which
come to exceed this amount will be reduced in
accordance with applicable law. The Fund may
borrow from banks, other Price Funds or other
persons to the extent permitted by applicable law;
(2) Commodities. Purchase or sell physical
commodities; except that the Funds (other than the
Money Fund) may enter into futures contracts and
options thereon;
(3) Equity Securities. Purchase equity securities, or
securities convertible into equity securities;
(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;
(5) Loans. Make loans, although the Fund may (i) lend
portfolio securities and 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
33 1/3% of the value of the Fund's total assets;
(ii) purchase money market securities and enter
into repurchase agreements; and (iii) acquire
PAGE 32
publicly-distributed or privately-placed debt
securities and purchase debt;
(6) 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;
(7) 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);
(8) 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) as permitted by applicable law;
(9) Senior Securities. Issue senior securities except
in compliance with the Investment Company Act of
1940;
(10) Taxable Securities. During periods of normal
market conditions, purchase any security if, as a
result, less than 80% of the Fund's income would
be exempt from federal income tax. The income
included under the 80% test doesn't include income
from securities subject to the alternative minimum
tax (AMT); 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.
PAGE 33
NOTES
With respect to investment restrictions (1) and
(5), the Funds will not borrow from or lend to any
other T. Rowe Price Fund unless they apply for and
receive an exemptive order from the SEC or the SEC
issues rules permitting such transactions. The
Funds have no current intention of engaging in any
such activity and there is no assurance the SEC
would grant any order requested by the Funds or
promulgate any rules allowing the transactions.
With respect to investment restriction (1), the
Money Fund has no current intention of engaging in
any borrowing transactions.
The following Notes should be read in connection
with the above-described fundamental policies.
The Notes are not fundamental policies.
With respect to investment restriction (2), the
Funds do not consider hybrid instruments as
commodities.
With respect to investment restriction (4), U.S.,
state or local governments, or related agencies or
instrumentalities, are not considered an industry.
Industrial development bonds issued by
nongovernmental users are not considered municipal
securities for purposes of this exception.
For purposes of investment restriction (6), the
Fund will treat bonds which are refunded with
escrowed U.S. government securities as U.S.
government securities.
Operating Policies
As a matter of operating policy, the Funds may not:
(1) Borrowing. The Funds will not purchase additional
securities when money borrowed exceeds 5% of its
total assets.
PAGE 34
(2) Control of Portfolio Companies. Invest in
companies for the purpose of exercising management
or control;
(3) Equity Securities. Purchase any equity security
or security convertible into an equity security
provided that the Fund (other than the Money Fund)
may invest up to 10% of its total assets in equity
securities which pay tax-exempt dividends and
which are otherwise consistent with the Fund's
investment objective and, further provided, that
the Money Fund may invest up to 10% of its total
assets in equity securities of other tax-free
open-end money market funds;
(4) Futures Contracts. Purchase a futures contract or
an option thereon if, with respect to positions in
futures or options on futures which do not
represent bona fide hedging, the aggregate initial
margin and premiums on such positions would exceed
5% of the Fund's net asset value;
(5) Illiquid Securities. Purchase illiquid securities
and securities of unseasoned issuers if, as a
result, more than 15% (10% for the Money Fund) of
its net assets would be invested in such
securities, 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% (10% Money Fund) limitation;
(6) 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 provided that, the
Money Fund may only purchase the securities of
other tax-free open-end money market investment
companies;
(7) 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
PAGE 35
with futures contracts or other permissible
investments;
(8) Mortgaging. Mortgage, pledge, hypothecate or, in
any manner, transfer any security owned by the
Fund as security for indebtedness except as may be
necessary in connection with permissible
borrowings or investments and then such
mortgaging, pledging or hypothecating may not
exceed 33 1/3% of the Fund's total assets at the
time of borrowing or investment;
(9) Oil and Gas Programs. Purchase participations or
other direct interests in or enter into leases
with respect to, oil, gas, or other mineral
exploration or development programs;
(10) Options, Etc. Invest in puts, calls, straddles,
spreads, or any combination thereof, except to the
extent permitted by the prospectus and Statement
of Additional Information;
(11) Ownership of Portfolio Securities by Officers and
Directors. Purchase or retain the securities of
any issuer if, those officers and directors of the
Fund, and of its investment manager, who each own
beneficially more than .5% of the outstanding
securities of such issuer, together own
beneficially more than 5% of such securities.
(12) Short Sales. Effect short sales of securities;
(13) Unseasoned Issuers. Purchase a security (other
than obligations issued or guaranteed by the U.S.,
any foreign, state or local 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 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). This restriction does not apply to
securities of pooled investment vehicles or
mortgage or asset-backed securities; or
PAGE 36
(14) Warrants. Invest in warrants, if, as a result
thereof, more than 2% of the value of the net
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 net 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 and warrants acquired by the Funds in units
or attached to securities may be deemed to be
without value.
With respect to investment restriction (6), the Funds
have no current intention of purchasing the securities
of other investment companies. Duplicate fees could
result from any such purchases.
For purposes of investment restriction (13), the Funds
will not consider industrial development bonds issued by
nongovernmental users as municipal securities.
Notwithstanding anything in the above fundamental and
operating restrictions to the contrary, each 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.
RATINGS OF MUNICIPAL DEBT SECURITIES
Moody's Investors Service, Inc.
Aaa - Bonds rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk.
PAGE 37
Aa - Bonds rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds.
A - Bonds rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations.
Baa - Bonds rated Baa are considered as medium-grade obligations,
i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the
present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba - Bonds rated Ba are judged to have speculative elements:
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very
moderate and thereby not well safeguarded during both good and
bad times over the future. Uncertainty of position characterize
bonds in this class.
B - Bonds rated B generally lack the characteristics of a
desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over
any long period of time may be small.
Caa - Bonds rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with
respect to principal or interest.
Ca - Bonds rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other
marked short-comings.
C - Lowest-rated; extremely poor prospects of ever attaining
investment standing.
Standard & Poor's Corporation
AAA - This is the highest rating assigned by Standard & Poor's to
a debt obligation and indicates an extremely strong capacity to
pay principal and interest.
AA - Debt rated AA has a very strong capacity to pay principal
and interest and differs from highest rated issues only in a
small degree.
A - Bonds rated A have a strong capacity to pay principal and
interest, although they are somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity
to pay principal and interest. Whereas they normally exhibit
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
PAGE 38
capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC, and CC are regarded on
balance, as predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal. BB
indicates the lowest degree of speculation and CC the highest
degree of speculation. While such bonds will likely have some
quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse
conditions.
D - In default.
Fitch Investors Service, Inc.
AAA - Bonds rated AAA are considered to be investment grade and
of the highest credit quality. The obligor has an exceptionally
strong ability to pay interest and repay principal, which is
unlikely to be affected by reasonably foreseeable events.
AA - Bonds rated AA are considered to be investment grade and of
very high credit quality. The obligor's ability to pay interest
and repay principal is very strong, although not quite as strong
as bonds rated AAA. Because bonds rated in the AAA and AA
categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rate
F-1+.
A - Bonds rated A are considered to be investment grade and of
high credit quality. The obligor's ability to pay interest and
repay principal is considered to be strong, but may be more
vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB - Bonds rated BBB are considered to be investment grade and
of satisfactory credit quality. The obligor's ability to pay
interest and repay principal is considered to be adequate.
Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds,
and therefore impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is higher
than for bonds with higher ratings.
BB, B, CCC, CC, and C are regarded on balance as predominantly
speculative with respect to the issuer's capacity to repay
interest and repay principal in accordance with the terms of the
obligation for bond issues not in default. BB indicates the
lowest degree of speculation and C the highest degree of
speculation. The rating takes into consideration special
features of the issue, its relationship to other obligations of
the issuer, and the current and prospective financial condition
and operating performance of the issuer.
PAGE 39
RATINGS OF MUNICIPAL NOTES AND VARIABLE RATE SECURITIES
MOODY'S INVESTORS SERVICE, INC. VMIG1/MIG-1: the best
quality. VMIG2/MIG-2: high quality, with margins of protection
ample though not so large as in the preceding group. VMIG3/MIG-
3: favorable quality, with all security elements accounted for,
but lacking the undeniable strength of the preceding grades.
Market access for refinancing, in particular, is likely to be
less well established. VMIG4/MIG4: adequate quality but there is
specific risk.
STANDARD & POOR'S CORPORATION. SP-1: very strong or strong
capacity to pay principal and interest. Those issues determined
to possess overwhelming safety characteristics will be given a
plus (+) designation. SP-2: satisfactory capacity to pay
interest and principal. SP-3: speculative capacity to pay
principal and interest.
FITCH INVESTORS SERVICE. F-1+: exceptionally strong credit
quality, strongest degree of assurance for timely payment. F-1:
Very strong credit quality. F-2: Good credit quality, having a
satisfactory degree of assurance for timely payment. F-3: Fair
credit quality, assurance for timely payment is adequate but
adverse changes could cause the securities to be rated below
investment grade. F-5: Weak credit quality, having
characteristics suggesting a minimal degree of assurance for
timely payment.
RATINGS OF COMMERCIAL PAPER
MOODY'S INVESTORS SERVICES, INC. P-1: superior capacity
for repayment. P-2: strong capacity for repayment. P-3:
acceptable capacity for repayment of short-term promissory
obligations.
STANDARD & POOR'S CORPORATION. A-1: highest category,
degree of safety regarding timely payment is strong. Those
issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation. A-
2: satisfactory capacity to pay principal and interest. A-3:
adequate capacity for timely payment, but are vulnerable to
adverse effects of changes in circumstances than higher rated
issues. B and C: speculative capacity to pay principal and
interest.
PAGE 40
FITCH INVESTORS SERVICE. F-1+: exceptionally strong credit
quality, strongest degree of assurance for timely payment. F-1:
Very strong credit quality. F-2: Good credit quality, having a
satisfactory degree of assurance for timely payment. F-3: Fair
credit quality, assurance for timely payment is adequate but
adverse changes could cause the securities to be rated below
investment grade. F-5: Weak credit quality, having
characteristics suggesting a minimal degree of assurance for
timely payment.
MANAGEMENT OF FUNDS
The officers and directors of each of the Funds 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 Funds' directors who are
considered "interested persons" of T. Rowe Price 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.
ROBERT P. BLACK, Director--Retired; formerly President,
Federal Reserve Bank of Richmond; Address: 10 Dahlgren Road,
Richmond, Virginia 23233
CALVIN W. BURNETT, PH.D., Director--President, Coppin State
College; Director, Maryland Chamber of Commerce and Provident
Bank of Maryland; Former President, Baltimore Area Council Boy
Scouts of America; Vice President, Board of Directors, The
Walters Art Gallery; Address: 2000 North Warwick Avenue,
Baltimore, Maryland 21216
*GEORGE J. COLLINS, Chairman of the Board--President, Chief
Executive Officer and Managing Director, T. Rowe Price; Director,
Rowe Price-Fleming International, Inc., T. Rowe Price Retirement
Plan Services, Inc. and T. Rowe Price Trust Company; Chartered
Investment Counselor
ANTHONY W. DEERING, Director--Director, President and Chief
Executive Officer, The Rouse Company, real estate developers,
Columbia, Maryland; Advisory Director, Kleinwort, Benson (North
America) Corporation, a registered broker-dealer; Address: 10275
Little Patuxent Parkway, Columbia, Maryland 21044
F. PIERCE LINAWEAVER, Director--President, F. Pierce Linaweaver &
Associates, Inc.; formerly (1987-1991) Executive Vice President,
EA Engineering, Science, and Technology, Inc., and (1987-1990)
PAGE 41
President, EA Engineering, Inc., Baltimore, Maryland; Address:
The Legg Mason Tower, 111 South Calvert Street, Suite 2700,
Baltimore, Maryland 21202
*WILLIAM T. REYNOLDS, President and Director--Managing Director,
T. Rowe Price
*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-Poulenc Rorer, Inc.
JOHN G. SCHREIBER, Director--President, Schreiber Investments,
Inc., a real estate investment company; Director, AMLI
Residential Properties Trust; Partner, Blackstone Real Estate
Partners, L.P.; Director and formerly (12/70-12/90) Executive
Vice President, JMB Realty Corporation, a national real estate
investment manager and developer; Director, Urban Shopping
Centers, Inc.; Address: 1115 East Illinois Road, Lake Forest,
Illinois 60045
ANNE MARIE WHITTEMORE, Director--Partner, law firm of McGuire,
Woods, Battle & Boothe, L.L.P., Richmond, Virginia; formerly,
Chairman (1991-1993) and Director (1989-1993), Federal Reserve
Bank of Richmond; Director, Owens & Minor, Inc., USF&G
Corporation, James River Corporation and Wilderness Conservancy
at Mountain Lake, Inc.; Board of Visitors, Old Dominion
University; Member, Virginia State Bar and American Bar
Association; Address: One James Center, 901 East Cary Street,
Richmond, Virginia 23219-4030
PATRICE L. BERCHTENBREITER, Executive Vice President--Vice
President, T. Rowe Price
MARY J. MILLER, Executive Vice President--Managing Director, T.
Rowe Price
PATRICIA S. DEFORD, Vice President--Vice President, T. Rowe Price
CHARLES B. HILL, Vice President--Assistant Vice President, T.
Rowe Price; formerly (9/86-11/91) managed municipal bonds at
Riggs National Bank, Washington, D.C.
CHARLES O. HOLLAND, Vice President--Vice President, T. Rowe Price
HENRY H. HOPKINS, Vice President--Vice President, Rowe Price-
Fleming International, Inc. and T. Rowe Price Retirement Plan
Services, Inc.; 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
LAURA L. McAREE, Vice President--Assistant Vice President, T.
Rowe Price; formerly (4/90-11/90) trader, Boeing Company,
Seattle, Washington and (8/87-3/90) financial analyst, Harvard
Management Company, Boston, Massachusetts
KONSTANTINE B. MALLAS, Vice President--Assistant Vice President,
T. Rowe Price
PAGE 42
THEORDORE E. ROBSON, Vice President--Employee, T. Rowe Price
C. STEPHEN WOLFE, II, Vice President--Vice President, T. Rowe
Price
LENORA V. HORNUNG, Secretary--Vice President, T. Rowe Price
PATRICIA S. BUTCHER, Assistant Secretary--Assistant Vice
President, T. Rowe Price and T. Rowe Price Investment Services,
Inc.
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, III, Assistant Vice President--Vice President,
Rowe Price-Fleming International, Inc. and T. Rowe Price
HUGH D. McGUIRK, Assistant Vice President--Assistant Vice
President, T. Rowe Price
EDWARD T. SCHNEIDER, Assistant Vice President--Vice President, T.
Rowe Price Services, Inc.
WILLIAM F. SNIDER, JR., Assistant Vice President--Employee, Price
Associates
INGRID I. VORDEMBERGE, Assistant Vice President--Employee, T.
Rowe Price
COMPENSATION TABLE
_________________________________________________________________
Pension or Total Compensation
Aggregate Retirement from Fund and
Name of Compensation Benefits Fund Group
Person, from Fund Accrued as Paid to
Position Expensesa Part of Fundb Directorsc
_________________________________________________________________
Summit Municipal Money Market
Robert P. Black, $894 N/A $52,667
Director
Calvin W. Burnett, 894 N/A 55,583
PH.D, Director
Anthony W. Deering, 894 N/A 66,333
Director
F. Pierce Linaweaver, 894 N/A 55,583
Director
John G. Schreiber, 894 N/A 55,667
Director
PAGE 43
Anne Marie Whittemore, 894 N/A 32,667
Director
George J. Collins, -- N/A --
Chairman of the Boardd
William T. Reynolds, -- N/A --
Directord
James S. Riepe, -- N/A --
Directord
Summit Municipal Intermediate
Robert P. Black, $874 N/A $52,667
Director
Calvin W. Burnett, 874 N/A 55,583
PH.D, Director
Anthony W. Deering, 874 N/A 66,333
Director
F. Pierce Linaweaver, 874 N/A 55,583
Director
John G. Schreiber, 874 N/A 55,667
Director
Anne Marie Whittemore, 874 N/A 32,667
Director
George J. Collins, -- N/A --
Chairman of the Boardd
William T. Reynolds, -- N/A --
Directord
James S. Riepe, -- N/A --
Directord
Summit Municipal Income
Robert P. Black, $853 N/A $52,667
Director
PAGE 44
Calvin W. Burnett, 853 N/A 55,583
PH.D, Director
Anthony W. Deering, 853 N/A 66,333
Director
F. Pierce Linaweaver, 853 N/A 55,583
Director
John G. Schreiber, 853 N/A 55,667
Director
Anne Marie Whittemore, 853 N/A 32,667
Director
George J. Collins, -- N/A --
Chairman of the Boardd
William T. Reynolds, -- N/A --
Directord
James S. Riepe, -- N/A --
Directord
a Amounts in this Column are for the period June 1, 1993
through May 31, 1994.
b Not applicable. The Fund does not pay pension or retirement
benefits to officers or directors/trustees of the Fund.
c Amounts in this column are for calendar year 1994, included
67 funds at December 31, 1994.
d Any director/trustee of the Fund who is an officer or
employee of T. Rowe Price receives no renumeration from the
Fund.
The Funds' Executive Committee, comprised of Messrs.
Collins, Reynolds, and Riepe, has been authorized by its
respective Board of Directors to exercise all powers of the Board
to manage the Funds in the intervals between meetings of the
Board, except the powers prohibited by statute from being
delegated.
PRINCIPAL HOLDERS OF SECURITIES
As of the date of the prospectus, the officers and directors
of the Funds, as a group, owned less than 1% of the outstanding
shares of each Fund.
PAGE 45
INVESTMENT MANAGEMENT SERVICES
Services Provided by T. Rowe Price
Under the Management Agreement with the Corporation relating
to each Fund, T. Rowe Price provides each Fund with discretionary
investment services. Specifically, T. Rowe Price is responsible
for supervising and directing the investments of each Fund in
accordance with its investment objectives, programs, and
restrictions as provided in the prospectus and this Statement of
Additional Information. T. Rowe Price is also responsible for
effecting all security transactions on behalf of each Fund,
including the allocation of principal business and portfolio
brokerage and the negotiation of commissions. In addition to
these services, T. Rowe Price provides each Fund with certain
corporate administrative services, including: maintaining the
Fund's corporate existence, corporate records, and registering
and qualifying the Fund's shares under federal and state laws;
monitoring the financial, accounting, and administrative
functions of each Fund; maintaining liaison with the agents
employed by each Fund such as the Fund's custodian and transfer
agent; assisting each Fund in the coordination of such agents'
activities; and permitting T. Rowe Price's employees to serve as
officers, directors, and committee members of each Fund without
cost to the Fund.
Each Fund's 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
Each Fund pays T. Rowe Price an annual all-inclusive fee
(the "Fee") of: 0.45% for the Money Fund; 0.50% for the
Intermediate Fund; and 0.50% for the Income Fund. The Fee is
paid monthly to T. Rowe Price on the first business day of the
next succeeding calendar month and is the sum of the daily fee
accruals for each month. The daily 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
appropriate Fee and multiplying this product by the net assets of
the Fund for that day, as determined in accordance with the
PAGE 46
Funds' prospectus as of the close of business on the previous
business day on which the Fund was open for business.
The Management Agreement between each Fund and T. Rowe Price
provides that T. Rowe Price will pay all expenses of each Fund's
operations, except interest, taxes, brokerage commissions, and
other charges incident to the purchase, sale or lending of the
Fund's portfolio securities, directors' fees and expenses
(including counsel fees and expenses) and such non-recurring or
extraordinary expenses that may arise, including the costs of
actions, suits or proceedings to which the Fund is a party and
the expenses the Fund may incur as a result of its obligation to
provide indemnification to its officers, directors and agents.
However, the Board of Directors for the Funds reserves the right
to impose additional fees against shareholder accounts to defray
expenses which would otherwise be paid by T. Rowe Price under the
management agreement. The Board does not anticipate levying such
charges; such a fee, if charged, may be retained by the Fund or
paid to T. Rowe Price.
DISTRIBUTOR FOR FUNDS
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 distributor of
the Funds. 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
each Fund's shares is continuous.
Investment Services is located at the same address as the
Funds and T. Rowe T. Rowe Price--100 East Pratt Street,
Baltimore, Maryland 21202.
Investment Services serves as distributor to the Funds
pursuant to individual Underwriting Agreements ("Underwriting
Agreements"), which provide that Investment Services will pay all
fees and expenses in connection with: registering and qualifying
the Fund's shares under the various state "blue sky" laws;
preparing, setting in type, printing, and mailing its
prospectuses and reports to shareholders; issuing its shares,
including expenses of confirming purchase orders; printing and
distributing prospectuses and reports for use in offering and
selling shares for each Fund; preparing, setting in type,
printing, and mailing all sales literature and advertising;
Investment Services' federal and state registrations as a
PAGE 47
broker-dealer; and offering and selling shares for each Fund.
The Underwriting Agreements provide that the Fund is responsible
for interest, taxes and such non-recurring or extraordinary
expenses that may arise, including the costs of actions, suits or
proceedings to which the Fund is a party and the expenses the
Fund may incur as a result of its obligation to provide
indemnification to Investment Services. Investment Services'
expenses are paid by T. Rowe Price.
Investment Services acts as the agent of the Funds in
connection with the sale of their 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 Funds.
CUSTODIAN
State Street Bank and Trust Company is the custodian for
each Fund's securities and cash, but it does not participate in
the Funds' investment decisions. The Funds have authorized the
Bank to deposit certain portfolio securities in central
depository systems as allowed by federal law. In addition, the
Funds are authorized to maintain certain of their securities, in
particular, variable rate demand notes, in uncertificated form,
in the proprietary deposit systems of various dealers in
municipal securities. The Bank's main office is 225 Franklin
Street, Boston, Massachusetts 02107.
CODE OF ETHICS
The Funds' investment adviser (T. Rowe Price) has a written
Code of Ethics which requires all employees to obtain prior
clearance before engaging in any personal securities
transactions. In addition, all employees must report their
personal securities transactions within ten days of their
execution. Employees will not be permitted to effect
transactions in a security: If there are pending client orders in
the security; the security has been purchased or sold by a client
within seven calendar days; the security is being considered for
purchase for a client; a change has occurred in T. Rowe Price's
rating of the security within five days; or the security is
subject to internal trading restrictions. Any material violation
of the Code of Ethics is reported to the Board of the Fund. The
PAGE 48
Board also reviews the administration of the Code of Ethics on an
annual basis.
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. The Fund's purchases
and sales of portfolio securities are normally done on a
principal basis and do not involve the payment of a commission
although they may involve the designation of selling concessions.
That part of the discussion below relating solely to brokerage
commissions would not normally apply to the Funds. However, it
is included because T. Rowe Price does manage a significant
number of common stock portfolios which do engage in agency
transactions and pay commissions and because some research and
services resulting from the payment of such commissions may
benefit the Funds.
How Brokers and Dealers are Selected
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, although the price usually includes an
undisclosed compensation. 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.
T. Rowe Price may effect principal transactions on behalf of
the Funds 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. Each Fund may
receive brokerage and research services in connection with such
designations in fixed price underwritings.
PAGE 49
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 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
PAGE 50
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.
Commissions to Brokers who Furnish Research Services
Certain brokers and dealers who provide quality brokerage
and execution services also furnish research services to T. Rowe
Price. With regard to the payment of brokerage commissions, 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. T. Rowe Price may receive research, as defined in
Section 28(e), in connection with selling concessions and
designations in fixed price offerings in which the Funds
participate.
PAGE 51
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 or dealers 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 or dealers,
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 or dealers and make judgments as to the level of
business which would recognize such services. In addition,
brokers or dealers 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 business is
allocated on the basis of all the considerations described above.
In no case is a broker or dealer 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 or dealers 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 and
dealers 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.
PAGE 52
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 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.
Other
For the fiscal year ended October 31, 1994, the Money Fund
engaged in portfolio transactions involving broker-dealers
totaling $193,850,000. The amount for the year represented
principal transactions as to which the Money Fund has no
knowledge of the profits or losses realized by the respective
PAGE 53
broker-dealers is $193,850,000. There were no amounts involving
trades with brokers acting as agents or underwriters for the
fiscal year ended October 31, 1994. For fiscal year ended
October 31, 1994, no orders were placed with firms which provided
research, statistical, or other services to T. Rowe Price in
connection with the management of the Money Fund or, in some
cases, to the Money Fund.
For the fiscal year ended October 31, 1994, the Intermediate
Fund engaged in portfolio transactions involving broker-dealers
totaling $85,155,000. For the fiscal year, $81,886,000
represented principal transactions as to which the Intermediate
Fund has no knowledge of the profits or losses realized by the
respective broker-dealers. For the fiscal year ending October
31, 1994, $3,270,000 involved trades with brokers acting as
agents or underwriters, in which such brokers received total
commission, including discounts received in connection with
underwritings of $17,000. For fiscal year ended October 31,
1994, no orders were placed with firms which provided research,
statistical, or other services to T. Rowe Price in connection
with the management of the Fund or, in some cases, to the Fund.
For the fiscal year ended October 31, 1994, the Income Fund
engaged in portfolio transactions involving broker-dealers
totaling $44,995,000. For the fiscal year, $41,154,000
represented principal transactions as to which the Income Fund
has no knowledge of the profits or losses realized by the
respective broker-dealers. For the fiscal year ending October
31, 1994, $3,841,000 involved trades with brokers acting as
agents or underwriters, in which such brokers received total
commission, including discounts received in connection with
underwritings of $27,000. For fiscal year ended October 31,
1994, no orders were placed with firms which provided research,
statistical, or other services to T. Rowe Price in connection
with the management of the Fund or, in some cases, to the Fund.
The portfolio turnover rates of the Intermediate and Income
Funds for the fiscal year ended October 31, 1994, were: 157.5%
and 161.1%, respectively.
PRICING OF SECURITIES
Fixed income securities are generally traded in the over-
the-counter market. Investments in securities with remaining
maturities of one year or more are stated at fair value using a
bid-side valuation as furnished by dealers who make markets in
PAGE 54
such securities or by an independent pricing service, which
considers yield or price of bonds of comparable quality, coupon,
maturity, and type, as well as prices quoted by dealers who make
markets in such securities.
Except with respect to certain securities held by the Money
Fund, securities with remaining maturities less than one year are
stated at fair value which is determined by using a matrix system
that establishes a value for each security based on bid-side
money market yields. Securities originally purchased by the
Money Fund with remaining maturities of 60 days or less are
valued at amortized cost. In addition, securities purchased by
the Money Fund with maturities in excess of 60 days, but which
currently have maturities of 60 days or less, are valued at their
amortized cost for the 60 days prior to maturity--such
amortization being based on the fair value of the securities on
the 61st day prior to maturity.
There are a number of pricing services available, and the
Directors of the Funds, on the basis of ongoing evaluation of
these services, may use or may discontinue the use of any pricing
service in whole or in part.
Securities or other assets for which the above valuation
procedures are deemed not to reflect fair value will be appraised
at prices deemed best to reflect their fair value. Such
determinations will be made in good faith by or under the
supervision of officers of each Fund as authorized by the Board
of Directors.
Maintenance of Money Fund's Net Asset Value Per Share at $1.00
It is the policy of the Fund to attempt to maintain a net
asset value of $1.00 per share by rounding to the nearest one
cent. This method of valuation is commonly referred to as "penny
rounding" and is permitted by Rule 2a-7 under the Investment
Company Act of 1940. Under Rule 2a-7:
(a) The Board of Directors of the Fund must undertake
to assure, to the extent reasonably practical taking
into account current market conditions affecting the
Fund's investment objectives, that the Fund's net asset
value will not deviate from $1.00 per share;
(b) The Fund must (i) maintain a dollar-weighted
average portfolio maturity appropriate to its objective
of maintaining a stable price per share, (ii) not
PAGE 55
purchase any instrument with a remaining maturity
greater than 397 days (or in the case of U.S.
government securities greater than 762 days), and (iii)
maintain a dollar-weighted average portfolio maturity
of 90 days or less;
(c) The Fund must limit its purchase of portfolio
instruments, including repurchase agreements, to those
U.S. dollar-denominated instruments which the Fund's
Board of Directors determines present minimal credit
risks, and which are eligible securities as defined by
Rule 2a-7 (eligible Securities are generally securities
which have been rated or whose issuer has been rated or
whose issuer has comparable securities rated in one of
the two highest rating categories by nationally
recognized statistical rating organizations or, in the
case of any instrument that is not so rated, is of
comparable quality as determined by procedures adopted
by the Fund's Board of Directors); and
(d) The Board of Directors must determine that (i) it
is in the best interest of the Fund and its
shareholders to maintain a stable net asset value per
share or stable price per share under the penny
rounding method; and (ii) the Fund will continue to use
the penny rounding method only so long as the Board of
Directors believes that it fairly reflects the market
based net asset value per share.
Although the Fund believes that it will be able to maintain
its net asset value at $1.00 per share under most conditions,
there can be no absolute assurance that it will be able to do so
on a continuous basis. If the Fund's net asset value per share
declined, or was expected to decline, below $1.00 (rounded to the
nearest one cent), the Board of Directors of the Fund might
temporarily reduce or suspend dividend payments in an effort to
maintain the net asset value at $1.00 per share. As a result of
such reduction or suspension of dividends, an investor would
receive less income during a given period than if such a
reduction or suspension had not taken place. Such action could
result in an investor receiving no dividend for the period during
which he holds his shares and in his receiving, upon redemption,
a price per share lower than that which he paid. On the other
hand, if the Fund's net asset value per share were to increase,
or were anticipated to increase above $1.00 (rounded to the
nearest one cent), the Board of Directors of the Fund might
PAGE 56
supplement dividends in an effort to maintain the net asset value
at $1.00 per share.
NET ASSET VALUE PER SHARE
The purchase and redemption price of the Funds' shares is
equal to the Funds' net asset value per share or share price.
Each Fund determines its net asset value per share by subtracting
the Funds' 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 each 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 net asset value of the Money Fund is also
calculated as of 12:00 noon (Eastern time) 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 a 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 a 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, the Fund's annual capital gain
distributions, if any, 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.
PAGE 57
TAX STATUS
Each Fund intends to qualify as a "regulated investment
company" under Subchapter M of the Internal Revenue Code of 1986,
as amended ("Code").
Dividends and distributions paid by any of the Funds are not
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. Each Fund must declare dividends equal
to at least 90% of net tax-exempt income (as of its year-end) to
permit pass-through of tax-exempt income to shareholders, and 98%
of capital gains (as of October 31) in order to avoid a federal
excise tax and 100% of capital gains (as of its tax year-end) to
avoid federal income tax.
At the time of your purchase, a Fund's net asset value may
reflect undistributed 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 a capital gain
distribution. For federal income tax purposes, a 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. On October 31, 1994, the books of each
Fund indicated that the Fund's aggregate net assets included:
Realized Capital Unrealized
Fund Gains/(Losses) Appreciation/(Depreciation)
Money $ (1,000) $ (4,000)
Intermediate (352,000) (293,000)
Income (291,000) (267,000)
If, in any taxable year, the Funds should not qualify as
regulated investment companies under the Code: (i) each Fund
would be taxed at normal corporate rates on the entire amount of
its taxable income, if any, without deduction for dividends or
other distributions to shareholders; and (ii) each 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 or tax-exempt dividends).
PAGE 58
The Funds anticipate acquiring bonds after initial issuance
at a price less than the principal amount of such bonds ("market
discount bonds"). Gain on the disposition of such bonds is
treated as taxable ordinary income to the extent of accrued
market discount. Such gains cannot be offset by losses on the
sale of other securities but must be distributed to shareholders
annually and taxed as ordinary income.
Each year, the Funds will mail you information on the tax
status of dividends and distributions. The Funds anticipate that
substantially all of the dividends to be paid by each Fund will
be exempt from federal income taxes. If any portion of a Fund's
dividends is not exempt from federal income taxes, you will
receive a Form 1099 stating the taxable portion. The Funds will
also advise you of the percentage of your dividends, if any,
which should be included in the computation of alternative
minimum tax. Social security recipients who receive interest
from tax-exempt securities may have to pay taxes on a portion of
their social security benefit.
Because the interest on municipal securities is tax exempt,
any interest on money you borrow that is directly or indirectly
used to purchase Fund shares is not deductible. (See Section
265(2) of the Internal Revenue Code.) Further, entities or
persons who are "substantial users" (or persons related to
"substantial users") of facilities financed by industrial
development bonds should consult their tax advisers before
purchasing shares of a Fund. The income from such bonds may not
be tax exempt for such substantial users.
YIELD INFORMATION
Money Fund
The Fund's current and historical yield for a period is
calculated by dividing the net change in value of an account
(including all dividends accrued and dividends reinvested in
additional shares) by the account value at the beginning of the
period to obtain the base period return. This base period return
is divided by the number of days in the period then multiplied by
365 to arrive at the annualized yield for that period. The
Fund's annualized compound yield for such period is compounded by
dividing the base period return by the number of days in the
period, and compounding that figure over 365 days.
PAGE 59
Intermediate and Income Funds
From time to time, a Fund may advertise a yield figure
calculated in the following manner:
An income factor is calculated for each security in the
portfolio based upon the security's market value at the beginning
of the period and yield as determined in conformity with
regulations of the Securities and Exchange Commission. The
income factors are then totalled for all securities in the
portfolio. Next, expenses of the Fund for the period net of
expected reimbursements are deducted from the income to arrive at
net income, which is then converted to a per-share amount by
dividing net income by the average number of shares outstanding
during the period. The net income per share is divided by the
net asset value on the last day of the period to produce a
monthly yield which is then annualized. A taxable equivalent
yield is calculated by dividing this yield by one minus the
effective federal income tax rate. Quoted yield factors are for
comparison purposes only, and are not intended to indicate future
performance or forecast the dividend per share of the Fund.
The yield of each Fund calculated under the above-described
method for the month ended October 31, 1994 was:
Fund
Money 2.89%
Intermediate 5.16%
Income 5.76%
The tax equivalent yields for these funds for the same
period were 4.45% (Money Fund), 7.48% (Intermediate Fund), and
8.35% (Income Fund). This assumes a federal tax bracket of
31.0%. Assuming a federal tax bracket of 28.0%, the tax-
equivalent yields for the period would be 4.26% (Money Fund),
7.17% (Intermediate Fund), and 8.00% (Income Fund).
PAGE 60
TAX-EXEMPT VS. TAXABLE YIELDS
From time to time, a Fund may also illustrate the effect of
tax equivalent yields using information such as that set forth on
the next page:
_________________________________________________________________
Your Taxable Income (1994)++ A Tax-Exempt Yield Of:
3% 4% 5% 6% 7%
Federal is Equivalent to a
Joint Return Single Return Tax Rates Taxable Yield of:
_________________________________________________________________
$36,901-$89,150 $22,101-$53,500 28.0 4.2 5.6 6.9 8.3 9.7
89,151-140,000 53,501-115,000 31.0 4.3 5.8 7.2 8.7 10.1
140,001-250,000 115,001-250,000 36.0 4.7 6.3 7.8 9.4 10.9
250,001 and above 250,001 and above 39.6 5.0 6.6 8.3 9.9 11.6
_________________________________________________________________
Your Taxable Income (1994)++ A Tax-Exempt Yield Of:
8% 9% 10% 11%
Federal is Equivalent to a
Joint Return Single Return Tax Rates Taxable Yield of:
_________________________________________________________________
$36,901-$89,150 $22,101-$53,500 28.0 11.1 12.5 13.9 15.3
89,151-140,000 53,501-115,000 31.0 11.6 13.0 14.5 15.9
140,001-250,000 115,001-250,000 36.0 12.5 14.1 15.6 17.2
250,001 and above 250,001 and above 39.6 13.2 14.9 16.6 18.2
_________________________________________________________________
+ Net amount subject to federal income tax after deductions and
exemptions.
++ Federal rates may vary depending on family size and nature and
amount of itemized deductions.
INVESTMENT PERFORMANCE
Total Return Performance
Each 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 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.
PAGE 61
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.
Cumulative Performance Percentage Change
1 Yr. Since
Ended Inception
10/31/94 10/29/94
Money Fund 2.35% 2.35%
Intermediate Fund 0.18% 0.18%
Income Fund -4.38% -4.38%
Average Annual Compound Rates of Return
1 Yr. Since
Ended Inception
10/31/94 10/31/94
Money Fund 2.35% 2.35%
Intermediate Fund 0.18% 0.18%
Income Fund -4.38% -4.38%
All Funds
From time to time, in reports and promotional literature,
the Funds' performance will be compared to (1) indices of broad
groups of managed and unmanaged securities considered to be
representative of or similar to Fund portfolio holdings (2) other
mutual funds, or (3) other measures of performance set forth in
publications such as:
Bond Buyer 20 - an estimation of the yield which would be
offered on 20-year general obligation bonds with a composite
rating of approximately "A." Published weekly by The Bond
Buyer, a trade paper of the municipal securities industry;
Shearson Lehman/American Express Municipal Bond Index - a
composite measure of the total return performance of the
municipal bond market. Based upon approximately 1500 bonds;
PAGE 62
Lipper General Purpose Municipal Bond Avg. - an average of
municipal mutual funds which invest 60% or more of their
assets in the top four tax-exempt credit ratings;
Lipper Analytical Services, Inc. - a widely used independent
research firm which ranks mutual funds by overall
performance, investment objectives, and assets;
Lipper Intermediate Municipal Avg. - an average of municipal
mutual funds which restrict their holdings to bonds with
maturities between 5 and 10 years;
Lipper Insured Municipal Avg. - an average of municipal
mutual funds which utilize insured municipal securities for
65% of their portfolios.
Lipper High-Yield Municipal Bond Avg. - an average of
municipal mutual funds which may utilize lower rated bonds
for 50% of their portfolio;
Lipper Insured Municipal Avg. - an average of municipal
mutual funds which utilize insured municipal securities for
65% of their portfolios.
Donoghue's Tax-Exempt Money Fund Avg. - an average of
municipal money market funds as reported in Donoghue's Money
Fund Report, which tracks the performance of all money
market mutual funds;
Prime General Obligations - bonds with maturities from 1-30
years which are secured by the full faith and credit of
issuers with taxing power;
MIG 1 - Moody's Investment Grade 1 - a short-term note with
a top quality rating from Moody's Investors Service, Inc.;
and
Morningstar, Inc. - a widely used independent research firm
which rates mutual funds by overall performance, investment
objectives, and assets.
Indices prepared by the research departments of such
financial organizations as Merrill Lynch, Pierce, Fenner & Smith,
Inc., will be used, as well as information provided by the
Federal Reserve Board.
PAGE 63
Information reported in the Bank Rate Monitor, an
independent publication which tracks the performance of certain
bank products, such as money market deposit accounts and
certificates of deposit, will also be used. Bank certificates of
deposit differ from mutual funds in several ways: the interest
rate established by the sponsoring bank is fixed for the term of
a CD; there are penalties for early withdrawal from CDs; and the
principal on a CD is insured.
Performance rankings and ratings reported periodically in
national financial publications such as MONEY, FORBES, BUSINESS
WEEK, BARRON'S, etc. may also be used.
Other Features and Benefits
Each Fund is a member of the T. Rowe Price Family of Funds
and may help investors achieve various long-term investment
goals, such as saving for a down payment on a home or paying
college costs. To explain how a 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 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
and 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. From time to time, other worksheets and guides may be
made available as well. Of course, an investment in a Fund
cannot guarantee that such goals will be met.
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.
PAGE 64
Other Publications
From time to time, in newsletters and other publications
issued by T. Rowe Price Investment Services, Inc., reference may
be made to economic, financial and political developments in the
U.S. and abroad and their effect on securities prices. Such
discussions may take the form of commentary on these developments
by T. Rowe Price mutual fund portfolio managers and their views
and analysis on how such developments could affect investments in
mutual funds.
Redemptions in Kind
In the unlikely event a shareholder were to receive an in
kind redemption of portfolio securities of the Funds, 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 Fund 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 Funds; (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.
CAPITAL STOCK
The Charter of the T. Rowe Price Summit Municipal Funds,
Inc. (the "Corporation") authorizes its 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
PAGE 65
applicable law, and might thus be superior or inferior to the
capital stock or to other classes or series in various
characteristics. The Corporation's 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
Funds have authorized to issue without shareholder approval.
Except to the extent that the Corporation'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
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 Corporation, a special meeting of
shareholders of the Corporation shall be called by the Secretary
of the Corporation on the written request of shareholders
entitled to cast at least 10% of all the votes of the Corporation
entitled to be cast at such meeting. Shareholders requesting
such a meeting must pay to the Corporation the reasonably
PAGE 66
estimated costs of preparing and mailing the notice of the
meeting. The Corporation, however, will otherwise assist the
shareholders seeking to hold the special meeting in communicating
to the other shareholders of the Corporation to the extent
required by Section 16(c) of the Investment Company Act of 1940.
FEDERAL AND STATE REGISTRATION OF SHARES
Each 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 LLP, whose address is
919 Third Avenue, New York, New York 10022, is legal counsel to
the Funds.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P., 217 East Redwood Street,
Baltimore, Maryland 21202, are independent accountants to the
Funds. The financial statements of the Funds for the fiscal year
ended October 31, 1994, and the report of independent accountants
are included in the Fund's Annual Report on page 23. A copy of
the Annual Report accompanies this Statement of Additional
Information. The following financial statements and the report
of independent accountants appearing in each Annual Report for
the fiscal year ended October 31, 1994, are incorporated into
this Statement of Additional Information by reference:
PAGE 67
MONEY
MARKET INTERMEDIATE INCOME
FUND FUND FUND
________ ___________ ___________
Report of Independent
Accountants 23 23 23
Portfolio of Investments,
October 31, 1994 7-11 11-14 14-16
Statement of Assets and
Liabilities,
October 31, 1994 17 17 17
Statement of Operations,
October 29, 1993 (Commencement
of Operations) to
October 31, 1994 18 18 18
Statement of Changes in Net
Assets, October 29, 1993
(Commencement of Operations)
to October 31, 1994 19 19 19
Notes to Financial Statements,
October 31, 1994 20-21 20-21 20-21
Financial Highlights,
October 29, 1993 (Commencement
of Operations) to
October 31, 1994 22 22 22
