PAGE 1
Combined Prospectus for the T. Rowe Price No-Load Variable
Annuity, dated May 1, 1995, should be inserted here.
Prospectus
May 1, 1995
The T. Rowe Price No-Load Variable Annuity
T. Rowe Price
Variable Annuity Center
PO Box 750440
Topeka, Kansas 66675-0440
NATL
Variable Annuity Prospectus
T. Rowe Price No-Load Variable Annuity
An Individual Flexible Premium
Deferred Variable Annuity Contract
May 1, 1995
____________________________________________________________________________
Issued By:
Security Benefit
Life Insurance Company
700 SW Harrison Street
Topeka, Kansas 66636-0001
1-800-888-2461
Mailing Address:
T. Rowe Price Variable
Annuity Service Center
P.O. Box 750440
Topeka, Kansas 66675-0440
1-800-469-6587
__________________________________________________________________________
INTRODUCTION
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THIS PROSPECTUS IS ACCOMPANIED BY A CURRENT PROSPECTUS FOR THE T. ROWE PRICE
EQUITY SERIES, INC., THE T. ROWE PRICE FIXED INCOME SERIES, INC. AND THE T.
ROWE PRICE INTERNATIONAL SERIES, INC. THE PROSPECTUSES SHOULD BE READ
CAREFULLY AND RETAINED FOR FUTURE REFERENCE.
This Prospectus describes the T. Rowe Price No-Load Variable Annuity-an
individual flexible premium deferred variable annuity contract (the
"Contract") issued by Security Benefit Life Insurance Company ("the Company").
The Contract is available for individuals as a non-tax qualified retirement
plan ("Non-Qualified Plan") or in connection with an individual retirement
annuity ("IRA") qualified under Section 408 of the Internal Revenue Code
("Qualified Plan"). The Contract is designed to give Contractowners
flexibility in planning for retirement and other financial goals.
During the Accumulation Period, the Contract provides for the accumulation of
a Contractowner's value on either a variable basis, a fixed basis, or both.
The Contract also provides several options for annuity payments on either a
variable basis, a fixed basis, or both to begin on the Annuity Payout Date.
The minimum initial purchase payment is $10,000 ($5,000 if made pursuant to an
Automatic Investment Program) to purchase a Contract in connection with a
Non-Qualified Plan and $2,000 ($25 if made pursuant to an Automatic Investment
Program) to purchase a Contract in connection with a Qualified Plan.
Subsequent purchase payments are flexible, though they must be for at least
$1,000 ($200 if made pursuant to an Automatic Investment Program) for a
Contract funding a Non-Qualified Plan or $500 ($25 if made pursuant to an
Automatic Investment Program) for a Contract funding a Qualified Plan.
Purchase payments may be allocated at the Contractowner's discretion to one or
more of the Subaccounts that comprise a separate account of the Company called
the T. Rowe Price Variable Annuity Account (the "Separate Account"), or to the
Fixed Interest Account of the Company. Each Subaccount of the Separate
Account invests in a corresponding portfolio ("Portfolio") of the T. Rowe
Price Equity Series, Inc., the T. Rowe Price Fixed Income Series, Inc. or the
T. Rowe Price International Series, Inc. (the "Funds"). Each Portfolio is
listed under its respective Fund below.
T. Rowe Price Equity Series, Inc.
T. Rowe Price New America Growth Portfolio
T. Rowe Price Equity Income Portfolio
T. Rowe Price Personal Strategy Balanced Portfolio
T. Rowe Price Fixed Income Series, Inc.
T. Rowe Price Limited-Term Bond Portfolio
T. Rowe Price International Series, Inc.
T. Rowe Price International Stock Portfolio
Prospective purchasers should be aware that the investments made by the Funds
at any given time are not expected to be the same as the investments made by
other mutual funds T. Rowe Price sponsors, including other mutual funds with
investment objectives and policies similar to those of the Funds.
The Contract Value in the Fixed Interest Account will accrue interest at rates
that are paid by the Company as described in "The Fixed Interest Account" on
page 28. Contract Value in the Fixed Interest Account is guaranteed by the
Company.
The Contract Value in the Subaccounts under a Contract will vary based on
investment performance of the Subaccounts to which the Contract Value is
allocated. No minimum amount of Contract Value in the Subaccounts is
guaranteed.
A Contract may be returned according to the terms of its Free-Look Right (see
"Free-Look Right," page 22). This Prospectus concisely sets forth information
about the Contract and the Separate Account that a prospective investor should
know before purchasing the Contract. Certain additional information is
contained in a "Statement of Additional Information," dated May 1, 1995, which
has been filed with the Securities and Exchange Commission (the "SEC"). The
Statement of Additional Information, as it may be supplemented from time to
time, is incorporated by reference into this Prospectus and is available at no
charge, by writing the T. Rowe Price Variable Annuity Service Center, P.O. Box
750440, Topeka, Kansas 66675-0440, or by calling 1-800-469-6587. The table of
contents of the Statement of Additional Information is set forth on page 44 of
this Prospectus.
Date: May 1, 1995
__________________________________________________________________________
CONTENTS
THE CONTRACT IS NOT AVAILABLE IN ALL STATES. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT BE
LAWFULLY MADE. NO PERSON IS AUTHORIZED TO MAKE ANY REPRESENTATIONS IN
CONNECTION WITH THIS OFFERING OTHER THAN AS CONTAINED IN THIS PROSPECTUS OR
THE STATEMENT OF ADDITIONAL INFORMATION, THE FUNDS' PROSPECTUS OR STATEMENT OF
ADDITIONAL INFORMATION, OR ANY SUPPLEMENT THERETO.
5 Definitions
7 Summary
10 Expense Table
11 Information About the Company, the Separate Account,
and the Funds
14 The Contract
24 Charges and Deductions
25 Annuity Period
28 The Fixed Interest Account
31 More About the Contract
32 Federal Tax Matters
40 Other Information
43 Performance Information
43 Additional Information
____________________________________________________________________________
____________________________________________________________________________
DEFINITIONS
VARIOUS TERMS COMMONLY USED IN THIS PROSPECTUS ARE DEFINED AS FOLLOWS:
Accumulation Period The period commencing on the Contract Date and ending on
the Annuity Payout Date or, if earlier, when the Contract is terminated,
either through a full withdrawal, payment of charges, or payment of the death
benefit proceeds.
Accumulation Unit A unit of measure used to calculate the value of a
Contractowner's interest in a Subaccount during the Accumulation Period.
Annuitant The person or persons on whose life annuity payments depend. If
Joint Annuitants are named in the Contract, "Annuitant" means both Annuitants
unless otherwise stated.
Annuity A series of periodic income payments made by the Company to an
Annuitant, Joint Annuitant, or Beneficiary during the period specified in the
Annuity Option.
Annuity Options Options under the Contract that prescribe the provisions
under which a series of annuity payments are made.
Annuity Period The period during which annuity payments are made.
Annuity Payout Date The date when annuity payments are scheduled to begin.
Automatic Investment Program A program pursuant to which purchase payments
are automatically paid from the owner's checking account on a specified day of
the month, on a monthly, quarterly, semiannual or annual basis, or a salary
reduction arrangement.
Contract Date The date shown as the Contract Date in a Contract. Annual
Contract anniversaries are measured from the Contract Date. It is usually the
date that the initial purchase payment is credited to the Contract.
Contractowner or Owner The person entitled to the ownership rights under the
Contract and in whose name the Contract is issued.
Contract Value The total value of the amounts in a Contract allocated to the
Sub-accounts of the Separate Account and the Fixed Interest Account as of any
Valuation Date.
Contract Year Each 12-month period measured from the Contract Date.
Designated Beneficiary The person having the right to the death benefit, if
any, pay-able upon the death of the Owner or the Joint Owner during the
Accumulation Period. The Designated Beneficiary is the first person on the
following list who is alive on the date of death of the Owner or the Joint
Owner: the Owner; the Joint Owner; the Primary Beneficiary; the Secondary
Beneficiary; the Annuitant; or if none of the above is alive, the Owner's
Estate.
Fixed Interest Account An account that is part of the Company's General
Account in which all or a portion of the Contract Value may be held for
accumulation at fixed rates of interest (which may not be less than 3%)
declared by the Company periodically at its discretion.
Funds T.Rowe Price Equity Series, Inc., T.Rowe Price Fixed Income Series,
Inc. and T.Rowe Price International Series, Inc. The Funds are diversified,
open-end management investment companies commonly referred to as mutual funds.
General Account All assets of the Company other than those allocated to the
Separate Account or to any other separate account of the Company.
Purchase Payment The amounts paid to the Company as consideration for the
Contract.
Separate Account The T. Rowe Price Variable Annuity Account is a separate
account of the Company. Contract Value under the Contract may be allocated to
Subaccounts of the Separate Account for variable accumulation.
Subaccount A division of the Separate Account of the Company which invests in
a separate Portfolio of one of the Funds. Currently, five Subaccounts are
available under the Contract.
T. Rowe Price Variable Annuity Service Center P.O. Box 750440, Topeka, Kansas
66675-0440, 1-800-469-6587.
Valuation Date Each date on which the Separate Account is valued, which
currently includes each day that the T. Rowe Price Variable Annuity Service
Center and the New York Stock Exchange are open for trading. The T. Rowe Price
Variable Annuity Service Center and the New York Stock Exchange are closed on
weekends and on the following holidays: New Year's Day, Presidents' Day, Good
Friday, Memorial Day, July Fourth, Labor Day, Thanksgiving Day, and Christmas
Day.
Valuation Period A period used in measuring the investment experience of each
Subaccount of the Separate Account. The Valuation Period begins at the close
of one Valuation Date and ends at the close of the next succeeding Valuation
Date.
Withdrawal Value The amount a Contractowner receives upon full withdrawal of
the Contract, which is equal to Contract Value less any premium taxes due and
paid by the Company.
__________________________________________________________________________
SUMMARY
This summary is intended to provide a brief overview of the more significant
aspects of the Contract. Further detail is provided in this Prospectus, the
Statement of Additional Information, and the Contract. Unless the context
indicates otherwise, the discussion in this summary and the remainder of the
Prospectus relates to the portion of the Contract involving the Separate
Account. The Fixed Interest Account is briefly described under "The Fixed
Interest Account" on page 28 and in the Contract.
Purpose of the Contract
The individual flexible premium deferred variable annuity contract
("Contract") described in this Prospectus is designed to give Contractowners
flexibility in planning for retirement and other financial goals. The
Contract provides for the accumulation of values on a variable basis, a fixed
basis, or both, during the Accumulation Period, and provides several options
for annuity payments on a variable basis, a fixed basis, or both. During the
Accumulation Period, an Owner can pursue various allocation options by
allocating purchase payments to the Subaccounts of the Separate Account or to
the Fixed Interest Account. See "The Contract," page 14.
The Contract is eligible for purchase as a non-tax qualified retirement plan
for an individual ("Non-Qualified Plan"). The Contract is also eligible for
purchase as an individual retirement annuity ("IRA") qualified under Section
408 of the Internal Revenue Code of 1986, as amended ("Qualified Plan").
The Separate Account and the Funds
Purchase payments designated to accumulate on a variable basis are allocated
to the Separate Account. See "Separate Account," page 12. The Separate
Account is currently divided into five accounts referred to as Subaccounts.
Each Subaccount invests exclusively in shares of a specific Portfolio of one
of the Funds. Each of the Funds' Portfolios has a different investment
objective or objectives. Each Portfolio is listed under its respective Fund
below.
T. Rowe Price Equity Series, Inc.
T. Rowe Price New America Growth Portfolio
T. Rowe Price Equity Income Portfolio
T. Rowe Price Personal Strategy Balanced Portfolio
T. Rowe Price Fixed Income Series, Inc.
T. Rowe Price Limited-Term Bond Portfolio
T. Rowe Price International Series, Inc.
T. Rowe Price International Stock Portfolio
Amounts held in a Subaccount will increase or decrease in dollar value
depending on the investment performance of the corresponding Portfolio in
which such Subaccount invests. The Contractowner bears the investment risk
for amounts allocated to a Subaccount of the Separate Account.
Fixed Interest Account
Purchase payments designated to accumulate on a fixed basis may be allocated
to the Fixed Interest Account, which is part of the Company's General Account.
Amounts allocated to the Fixed Interest Account earn interest at rates
determined at the discretion of the Company and that are guaranteed to be at
least an effective annual rate of 3%. See "The Fixed Interest Account" on
page 28.
Purchase Payments
The minimum initial purchase payment is $10,000 ($5,000 if made pursuant to an
Automatic Investment Program) for a Contract issued in connection with a
Non-Qualified Plan and $2,000 ($25 if made pursuant to an Automatic Investment
Program) for a Contract issued in connection with a Qualified Plan.
Thereafter, the Contractowner may choose the amount and frequency of purchase
payments, except that the minimum subsequent purchase payment is $1,000 ($200
if made pursuant to an Automatic Investment Program) for a Contract funding a
Non-Qualified Plan or $500 ($25 if made pursuant to an Automatic Investment
Program) for a Contract funding a Qualified Plan. See "Purchase Payments" on
page 15.
Contract Benefits
During the Accumulation Period, Contract Value may be exchanged by the
Contractowner among the Subaccounts of the Separate Account and to and from
the Fixed Interest Account, subject to certain restrictions as described in
"The Contract" on page 14 and "The Fixed Interest Account" on page 28.
At any time before the Annuity Payout Date, a Contract may be surrendered for
its Withdrawal Value, and partial withdrawals, including systematic
withdrawals, may be taken from the Contract Value, subject to certain
restrictions described in "The Fixed Interest Account" on page 28. See "Full
and Partial Withdrawals," page 20 and "Federal Tax Matters," page 32 for more
information about withdrawals, including the 10% penalty tax that may be
imposed upon full and partial withdrawals (including systematic withdrawals)
made prior to the Owner attaining age 59 1/2.
The Contract provides for a death benefit upon the death of the Owner during
the Accumulation Period. See "Death Benefit," on page 22 for more
information. The Contract provides for several Annuity Options on either a
variable basis, a fixed basis, or both. Payments under the fixed Annuity
Options will be guaranteed by the Company. See "Annuity Period" on page 25.
Free-Look Right
An Owner may return a Contract within the Free-Look Period, which is generally
a 10-day period beginning when the Owner receives the Contract. In this
event, the Company will refund to the Owner purchase payments allocated to the
Fixed Interest Account plus the Contract Value in the Subaccounts increased by
any fees or other charges paid. The Company will refund purchase payments
allocated to the Subaccounts rather than the Contract Value in those states
and circumstances in which it is required to do so. See "Free-Look Right" on
page 22.
Charges and Deductions
The Company does not make any deductions for sales load from purchase
payments. Certain charges will be deducted in connection with the Contract as
described below.
o Mortality and Expense Risk Charge The Company deducts a daily charge
from the assets of each Subaccount for mortality and expense risks equal
to an annual rate of .55% of each Subaccount's average daily net assets.
See "Mortality and Expense Risk Charge" on page 24.
o Premium Tax Charge The Company assesses a premium tax charge to
reimburse itself for any premium taxes that it incurs with respect to
this Contract. This charge will usually be deducted on annuitization or
upon full withdrawal if a premium tax was incurred by the Company and is
not refundable. Partial withdrawals, including systematic withdrawals,
may be subject to a premium tax charge if a premium tax is incurred on
the withdrawal by the Company and is not refundable. The Company
reserves the right to deduct such taxes when due or anytime thereafter.
Premium tax rates currently range from 0% to 3.5%. See "Premium Tax
Charge" on page 24.
o Other Expenses The operating expenses of the Separate Account are paid
by the Company. Investment management fees and operating expenses of
the Funds are paid by the Funds and are reflected in the net asset value
of Fund shares. For a description of these charges and expenses, see
the Prospectus for the Funds.
Contacting the Company
All written requests, notices, and forms required by the Contract, and any
questions or inquiries should be directed to the T. Rowe Price Variable
Annuity Service Center, at P.O. Box 750440, Topeka, Kansas 66675-0440,
1-800-469-6587.
__________________________________________________________________________
EXPENSE TABLE
The purpose of this table is to assist investors in understanding the various
costs and expenses borne directly and indirectly by Owners allocating Contract
Value to the Subaccounts. The table reflects any contractual charges,
expenses of the Separate Account, and charges and expenses of the Funds. The
table does not reflect premium taxes that may be imposed by various
jurisdictions. See "Premium Tax Charge," on page 24. The information
contained in the table is not applicable to amounts allocated to the Fixed
Interest Account.
For a complete description of a Contract's costs and expenses, see "Charges
and Deductions," on page 24. For a more complete description of each Fund's
costs and expenses, see the Fund Prospectus, which accompanies this
Prospectus.
__________________________________________________________________________
CONTRACTUAL EXPENSES
____________________________________________________________________________
Sales Load on Purchase Payments None
____________________________________________________________________________
Annual Maintenance Fee None
____________________________________________________________________________
Annual Separate Account Expenses
____________________________________________________________________________
Annual Mortality and Expense Risk
Charge (as a percentage of each
Subaccount's average daily net assets) .55%
____________________________________________________________________________
Total Annual Separate Account Expenses .55%
____________________________________________________________________________
Annual Portfolio Expenses (as a percentage of each Portfolio's
average daily net assets)
____________________________________________________________________________
Total
Management Other Portfolio
Fee* Expenses Expenses
__________________________________________
T. Rowe Price New America
Growth Portfolio .85% 0% .85%
____________________________________________________________________________
T. Rowe Price International
Stock Portfolio 1.05% 0% 1.05%
____________________________________________________________________________
T. Rowe Price Equity Income
Portfolio .85% 0% .85%
____________________________________________________________________________
T. Rowe Price Personal Strategy
Balanced Portfolio .90% 0% .90%
____________________________________________________________________________
T. Rowe Price Limited-Term
Bond Portfolio .70% 0% .70%
____________________________________________________________________________
Table 1
*The management fee includes the ordinary expenses of
operating the Funds.
Example
The example presented below shows expenses that a Contractowner would pay at
the end of one or three years. The information presented applies if, at the
end of those time periods, the Contract is (1) surrendered, (2) annuitized, or
(3) not surrendered or annuitized. The example shows expenses based upon an
allocation of $1,000 to each of the Subaccounts.
The example below should not be considered a representation of past or future
expenses. Actual expenses may be greater or lesser than those shown. The 5%
return assumed in the examples is hypothetical and should not be considered a
representation of past or future actual returns, which may be greater or
lesser than the assumed amount.
Example - The Owner would pay the expenses shown below on a $1,000 investment,
assuming 5% annual return on assets:
____________________________________________________________________________
1 Year 3 Years
____________________________________________________________________________
New America Growth Subaccount $14 $44
____________________________________________________________________________
International Stock Subaccount $16 $50
____________________________________________________________________________
Equity Income Subaccount $14 $44
____________________________________________________________________________
Personal Strategy Balanced Subaccount $15 $46
____________________________________________________________________________
Limited-Term Bond Subaccount $13 $40
____________________________________________________________________________
____________________________________________________________________________
INFORMATION ABOUT THE COMPANY, THE SEPARATE ACCOUNT, AND THE FUNDS
Security Benefit Life Insurance Company
The Company is a mutual life insurance company organized under the laws of the
State of Kansas. It was organized originally as a fraternal benefit society
and commenced business February 22, 1892. It became a mutual life insurance
company under its present name on January 2, 1950.
The Company offers a complete line of life insurance policies and annuity
contracts, as well as financial and retirement services. It is admitted to do
business in the District of Columbia, and in all states except New York. As
of the end of 1994, Security Benefit had over $13 billion of life insurance in
force and total assets of approximately $2.5 billion. Together with its
subsidiaries, Security Benefit has total funds under management of
approximately $4.8 billion.
Published Ratings
The Company may from time to time publish in advertisements, sales literature
and reports to Owners, the ratings and other information assigned to it by one
or more independent rating organizations such as A.M. Best Company and
Standard & Poor's. The purpose of the ratings is to reflect the financial
strength and/or claims-paying ability of the Company and should not be
considered as bearing on the investment performance of assets held in the
Separate Account. Each year the A.M. Best Company reviews the financial
status of thousands of insurers, culminating in the assignment of Best's
Ratings. These ratings reflect their current opinion of the relative
financial strength and operating performance of an insurance company in
comparison to the norms of the life/health insurance industry. In addition,
the claims-paying ability of the Company as measured by Standard & Poor's
Insurance Ratings Services may be referred to in advertisements or sales
literature or in reports to Owners. These ratings are opinions of an
operating insurance company's financial capacity to meet the obligations of
its insurance and annuity policies in accordance with their terms. Such
ratings do not reflect the investment performance of the Separate Account or
the degree of risk associated with an investment in the Separate Account.
Separate Account
T. Rowe Price Variable Annuity Account
The T. Rowe Price Variable Annuity Account was established by the Company as a
separate account on March 28, 1994, pursuant to procedures established under
Kansas law. The income, gains, or losses of the Separate Account, whether or
not realized, are, in accordance with the Contracts, credited to or charged
against the assets of the Separate Account without regard to other income,
gains, or losses of the Company. K.S.A. 40-436 provides that assets in a
separate account attributable to the reserves and other liabilities under the
contracts are not chargeable with liabilities arising from any other business
that the insurance company conducts if, and to the extent the contracts so
provide, and the Contract contains such a provision. The Company owns the
assets in the Separate Account and is required to maintain sufficient assets
in the Separate Account to meet all Separate Account obligations under the
Contracts. The Company may transfer to its General Account assets that exceed
anticipated obligations of the Separate Account. All obligations arising
under the Contracts are general corporate obligations of the Company. The
Company may invest its own assets in the Separate Account for other purposes,
but not to support contracts other than variable annuity contracts, and may
accumulate in the Separate Account proceeds from Contract charges and
investment results applicable to those assets.
The Separate Account is currently divided into five Subaccounts. Income,
gains and losses, whether or not realized, are, in accordance with the
Contracts, credited to, or charged against, the assets of each Subaccount
without regard to the income, gains or losses in the other Subaccounts. Each
Subaccount invests exclusively in shares of a specific Portfolio of one of the
Funds. The Company may in the future establish additional Subaccounts of the
Separate Account, which may invest in other Portfolios of the Funds or in
other securities, mutual funds, or investment vehicles. Under current
contractual arrangements with the underwriter, T. Rowe Price Investment
Services, Inc. ("Investment Services"), the Company cannot add new
Subaccounts, or substitute shares of another portfolio, without the consent of
Investment Services, unless such change is necessary to comply with applicable
laws, shares of any or all of the Portfolios should no longer be available for
investment, or, if, in the Company's judgment, further investment in shares of
any or all of the Portfolios should become inappropriate in view of the
purposes of the Contract. For more information about the underwriter, see
"Distribution of the Contract," page 42.
The Separate Account is registered with the SEC as a unit investment trust
under the Investment Company Act of 1940 (the "1940 Act"). Registration with
the SEC does not involve supervision by the SEC of the administration or
investment practices of the Separate Account or of the Company.
The Funds
The T. Rowe Price Equity Series, Inc., the T. Rowe Price Fixed Income Series,
Inc. and the T. Rowe Price International Series, Inc. (the "Funds") are
diversified, open-end management investment companies of the series type. The
Funds are registered with the SEC under the 1940 Act. Such registration does
not involve supervision by the SEC of the investments or investment policy of
the Funds. Together, the Funds currently have five separate portfolios
("Portfolios"), each of which pursues different investment objectives and
policies.
In addition to the Separate Account, shares of the Funds are being sold to
variable life insurance and variable annuity separate accounts of other
insurance companies, including insurance companies affiliated with the
Company. In the future, it may be disadvantageous for variable annuity
separate accounts of other life insurance companies, or for both variable life
insurance separate accounts and variable annuity separate accounts, to invest
simultaneously in the Funds, although currently neither the Company nor the
Funds foresee any such disadvantages to either variable annuity owners or
variable life insurance owners. The management of the Funds intends to
monitor events in order to identify any material conflicts between or among
variable annuity owners and variable life insurance owners and to determine
what action, if any, should be taken in response. In addition, if the Company
believes that any Fund's response to any of those events or conflicts
insufficiently protects Owners, it will take appropriate action on its own.
For more information see the Funds' prospectus.
A summary of the investment objective of each Portfolio of the Funds is
described below. There can be no assurance that any Portfolio will achieve
its objective. More detailed information is contained in the accompanying
prospectus of the Funds, including information on the risks associated with
the investments and investment techniques of each Portfolio.
The Funds' prospectus accompanies this prospectus and should be read carefully
before investing.
T. Rowe Price New America Growth Portfolio
The investment objective of the New America Growth Portfolio is long-term
growth of capital through investments primarily in the common stocks of U.S.
growth companies which operate in service industries.
T. Rowe Price International Stock Portfolio
The investment objective of the International Stock Portfolio is to seek
long-term growth of capital through investments primarily in common stocks of
established, non-U.S. companies.
T. Rowe Price Equity Income Portfolio
The investment objective of the Equity Income Portfolio is to provide
substantial dividend income and also capital appreciation by investing
primarily in dividend-paying common stocks of established companies.
T. Rowe Price Personal Strategy Balanced Portfolio
The investment objective of the Personal Strategy Balanced Portfolio is to
seek the highest total return over time consistent with an emphasis on both
capital appreciation and income.
T. Rowe Price Limited-Term Bond Portfolio
The investment objective of the Limited-Term Bond Portfolio is to seek a high
level of income consistent with moderate price fluctuation by investing
primarily in short- and intermediate-term investment grade debt securities.
The Investment Advisers
T. Rowe Price Associates, Inc. ("T. Rowe Price"), located at 100 East Pratt
Street, Baltimore, Maryland 21202, serves as Investment Adviser to each
Portfolio, except the T. Rowe Price International Stock Portfolio. Rowe
Price-Fleming International, Inc. ("Price-Fleming"), an affiliate of T. Rowe
Price, serves as Investment Adviser to the T. Rowe Price International Stock
Portfolio. Price-Fleming's U.S. office is located at 100 East Pratt Street,
Baltimore, Maryland 21202. As Investment Adviser to each of the Portfolios,
except the T. Rowe Price International Stock Portfolio, T. Rowe Price is
responsible for selection and management of their portfolio investments. As
Investment Adviser to the T. Rowe Price International Stock Portfolio,
Price-Fleming is responsible for selection and management of its portfolio
investments. Each of T. Rowe Price and Price-Fleming is registered with the
SEC as an investment adviser.
T. Rowe Price and Price-Fleming are not affiliated with the Company, and the
Company has no responsibility for the management or operations of the
Portfolios.
__________________________________________________________________________
THE CONTRACT
General
The Contract offered by this Prospectus is an individual flexible premium
deferred variable annuity that is issued by the Company. To the extent that
all or a portion of purchase payments are allocated to the Subaccounts, the
Contract is significantly different from a fixed annuity contract in that it
is the Owner under a Contract who assumes the risk of investment gain or loss
rather than the Company. During the Accumulation Period, a Contractowner's
value accumulates on either a variable basis, a fixed basis, or both,
depending on the Owner's allocation of Contract Value to the Subaccounts and
the Fixed Interest Account. The Contract also provides several Annuity
Options under which the Company will pay periodic annuity payments on a
variable basis, a fixed basis or both, beginning on the Annuity Payout Date.
The amount that will be available for annuity payments will depend on the
investment performance of the Subaccounts to which Contract Value has been
allocated and the amount of interest credited on Contract Value that has been
allocated to the Fixed Interest Account.
The Contract is available for purchase as a non-tax qualified retirement plan
("Non-Qualified Plan") by an individual. The Contract is also eligible for
purchase as an individual retirement annuity ("IRA") qualified under Section
408 of the Internal Revenue Code ("Qualified Plan"). Joint Owners are
permitted only on a Contract issued pursuant to a Non-Qualified Plan.
Application for a Contract
Any person wishing to purchase a Contract may submit an application and an
initial purchase payment to the Company, as well as any other form or
information that the Company may require. The initial purchase payment may be
made by check or, if an applicant owns shares of one or more mutual funds
distributed by Investment Services ("T. Rowe Price Funds"), by electing on the
application to redeem shares of that fund(s) and forward the redemption
proceeds to the Company. Any such transaction shall be effected by Investment
Services, the distributor of the T. Rowe Price mutual funds and the Contract.
The redemption of fund shares is a sale of shares for tax purposes, which may
result in a taxable gain or loss. The application may be obtained by
contacting the T. Rowe Price Variable Annuity Service Center. The Company
reserves the right to reject an application or purchase payment for any
reason, subject to the Company's underwriting standards and guidelines and any
applicable state or federal law relating to nondiscrimination.
The maximum age of an Owner or Annuitant for which a Contract will be issued
is 85. If there are Joint Owners or Annuitants, the maximum issue age will be
determined by reference to the older Owner or Annuitant.
Purchase Payments
The minimum initial purchase payment for the purchase of a Contract is $10,000
($5,000 if made pursuant to an Automatic Investment Program) in connection
with a Non-Qualified Plan and $2,000 ($25 if made pursuant to an Automatic
Investment Program) in connection with a Qualified Plan. Thereafter, the
Contractowner may choose the amount and frequency of purchase payments, except
that the minimum subsequent purchase payment is $1,000 ($200 if made pursuant
to an Automatic Investment Program) for Non-Qualified Plans and $500 ($25 if
made pursuant to an Automatic Investment Program) for Qualified Plans. The
Company may reduce the minimum purchase payment requirements under certain
circumstances, such as for group or sponsored arrangements. Cumulative
purchase payments exceeding $1 million will not be accepted under a Contract
without prior approval of the Company.
An initial purchase payment will be applied not later than the end of the
second Valuation Date after the Valuation Date it is received by the Company
at the T. Rowe Price Variable Annuity Service Center if the purchase payment
is preceded or accompanied by an application that contains sufficient
information necessary to establish an account and properly credit such
purchase payment. If the Company does not receive a complete application, the
Company will notify the applicant that it does not have the necessary
information to issue a Contract. If the necessary information is not provided
to the Company within five Valuation Dates after the Valuation Date on which
the Company first receives the initial purchase payment or if the Company
determines it cannot otherwise issue the Contract, the Company will return the
initial purchase payment to the applicant unless the applicant consents to the
Company retaining the purchase payment until the application is made complete.
Subsequent purchase payments will be credited as of the end of the Valuation
Period in which they are received by the Company at the T. Rowe Price Variable
Annuity Service Center. Purchase payments after the initial purchase payment
may be made at any time prior to the Annuity Payout Date, so long as the Owner
is living. Subsequent purchase payments under a Qualified Plan may be limited
by the terms of the plan and provisions of the Internal Revenue Code.
Subsequent purchase payments may be paid under an Automatic Investment Program
or, if an Owner owns shares of one or more T. Rowe Price Funds, by directing
Investment Services to redeem shares of that fund(s) and forward the
redemption proceeds to the Company as a subsequent purchase payment. The
minimum initial purchase payment required must be paid before the Automatic
Investment Program will be accepted by the Company. The redemption of fund
shares is a sale of shares for tax purposes, which may result in a taxable
gain or loss.
Allocation of Purchase Payments
In an application for a Contract, the Contractowner selects the Subaccounts or
the Fixed Interest Account to which purchase payments will be allocated.
Purchase payments will be allocated according to the Contractowner's
instructions contained in the application or more recent instructions
received, if any, except that no purchase payment allocation is permitted that
would result in less than $25 per payment being allocated to any one
Subaccount or the Fixed Interest Account. Available allocation alternatives
include the five Subaccounts and the Fixed Interest Account.
A Contractowner may change the purchase payment allocation instructions by
submitting a proper written request to the T. Rowe Price Variable Annuity
Service Center. A proper change in allocation instructions will be effective
upon receipt by the Company at the T. Rowe Price Variable Annuity Service
Center and will continue in effect until subsequently changed. Changes in
purchase payment allocation instructions may be made by telephone or by
sending a request in writing to the T. Rowe Price Variable Annuity Service
Center. Changes in the allocation of future purchase payments have no effect
on existing Contract Value. Such Contract Value, however, may be exchanged
among the Subaccounts of the Separate Account or the Fixed Interest Account in
the manner described in "Exchanges of Contract Value," page 19.
Dollar Cost Averaging Option
The Company currently offers an option under which Contractowners may dollar
cost average their allocations in the Subaccounts under the Contract by
authorizing the Company to make periodic allocations of Contract Value from
any one Subaccount to one or more of the other Subaccounts. Dollar cost
averaging is a systematic method of investing in which securities are
purchased at regular intervals in fixed dollar amounts so that the cost of the
securities gets averaged over time and possibly over various market cycles.
The option will result in the allocation of Contract Value to one or more
Subaccounts, and these amounts will be credited at the Accumulation Unit value
as of the end of the Valuation Dates on which the exchanges are effected.
Since the value of Accumulation Units will vary, the amounts allocated to a
Subaccount will result in the crediting of a greater number of units when the
Accumulation Unit value is low and a lesser number of units when the
Accumulation Unit value is high. Similarly, the amounts exchanged from a
Subaccount will result in a debiting of a greater number of units when the
Subaccount's Accumulation Unit value is low and a lesser number of units when
the Accumulation Unit value is high. Dollar cost averaging does not guarantee
profits, nor does it assure that a Contractowner will not have losses.
A Dollar Cost Averaging Request form is available from the T. Rowe Price
Variable Annuity Service Center upon request. On the form, the Contractowner
must designate whether Contract Value is to be exchanged on the basis of a
specific dollar amount, a fixed period or earnings only, the Subaccount or
Subaccounts to and from which the exchanges will be made, the desired
frequency of the exchanges, which may be on a monthly, quarterly, semiannual,
or annual basis, and the length of time during which the exchanges shall
continue or the total amount to be exchanged over time.
To elect the Dollar Cost Averaging Option, the Owner's Contract Value must be
at least $5,000, ($2,000 for a Contract funding a Qualified Plan), and a
Dollar Cost Averaging Request in proper form must be received by the Company
at the T. Rowe Price Variable Annuity Service Center. The Dollar Cost
Averaging Request form will not be considered complete until the
Contractowner's Contract Value is at least the required amount. A
Contractowner may not have in effect at the same time Dollar Cost Averaging
and Asset Rebalancing Options.
After the Company has received a Dollar Cost Averaging Request in proper form
at the T. Rowe Price Variable Annuity Service Center, the Company will
exchange Contract Value in amounts designated by the Contractowner from the
Subaccount from which exchanges are to be made to the Subaccount or
Subaccounts chosen by the Contractowner. The minimum amount that may be
exchanged is $200 and the minimum amount that may be allocated to any one
Subaccount is $25. Each exchange will be effected on the date specified by
the Owner or if no date is specified, on the monthly, quarterly, semiannual,
or annual anniversary, whichever corresponds to the period selected by the
Contractowner, of the date of receipt at the T. Rowe Price Variable Annuity
Service Center of a Dollar Cost Averaging Request in proper form. Exchanges
will be made until the total amount elected has been exchanged, or until
Contract Value in the Subaccount from which exchanges are made has been
depleted. Amounts periodically exchanged under this option are not included
in the six exchanges per Contract Year that are allowed as discussed in
"Exchanges of Contract Value" on page 19.
A Contractowner may instruct the Company at any time to terminate the option
by written request to the T. Rowe Price Variable Annuity Service Center. In
that event, the Contract Value in the Subaccount from which exchanges were
being made that has not been exchanged will remain in that Subaccount unless
the Contractowner instructs otherwise. If a Contractowner wishes to continue
exchanging on a dollar cost averaging basis after the expiration of the
applicable period, the total amount elected has been exchanged, or the
Subaccount has been depleted, or after the Dollar Cost Averaging Option has
been canceled, a new Dollar Cost Averaging Request must be completed and sent
to the T. Rowe Price Variable Annuity Service Center, and the Contract must
meet the $5,000 ($2,000 for a Contract funding a Qualified Plan) minimum
required amount of Contract Value at that time. The Company may discontinue,
modify, or suspend the Dollar Cost Averaging Option at any time provided that,
as required by its current contractual arrangements with Investment Services,
the Company first obtains the consent of Investment Services, which consent
shall not be unreasonably withheld.
Contract Value may also be dollar cost averaged to or from the Fixed Interest
Account, subject to certain restrictions described under "The Fixed Interest
Account," page 28.
Asset Rebalancing Option
The Company currently offers an option under which Contractowners may
authorize the Company to automatically exchange Contract Value each quarter to
maintain a particular percentage allocation among the Subaccounts as selected
by the Contractowner. The Contract Value allocated to each Subaccount will
grow or decline in value at different rates during the quarter, and Asset
Rebalancing automatically reallocates the Contract Value in the Subaccounts
each quarter to the allocation selected by the Contractowner. Asset
Rebalancing is intended to exchange Contract Value from those Subaccounts that
have increased in value to those Subaccounts that have declined in value.
Over time, this method of investing may help a Contractowner buy low and sell
high, although there can be no assurance of this. This investment method does
not guarantee profits, nor does it assure that a Contractowner will not have
losses.
To elect the Asset Rebalancing Option, the Contract Value in the Contract must
be at least $10,000 ($2,000 for a Contract funding a Qualified Plan) and an
Asset Rebalancing Request in proper form must be received by the Company at
the T. Rowe Price Variable Annuity Service Center. A Contractowner may not
have in effect at the same time Dollar Cost Averaging and Asset Rebalancing
Options. An Asset Rebalancing Request form is available upon request. On the
form, the Contractowner must indicate the applicable Subaccounts and the
percentage of Contract Value which should be allocated to each of the
applicable Subaccounts each quarter under the Asset Rebalancing Option. If
the Asset Rebalancing Option is elected, all Contract Value allocated to the
Subaccounts must be included in the Asset Rebalancing Option.
This option will result in the exchange of Contract Value to one or more of
the Subaccounts on the date specified by the Contractowner or, if no date is
specified, on the date of the Company's receipt of the Asset Rebalancing
Request in proper form and on each quarterly anniversary of the applicable
date thereafter. The amounts exchanged will be credited at the Accumulation
Unit value as of the end of the Valuation Dates on which the exchanges are
effected. Amounts periodically exchanged under this option are not included
in the six exchanges per Contract Year that are allowed as discussed below.
A Contractowner may instruct the Company at any time to terminate this option
by written request to the T. Rowe Price Variable Annuity Service Center and,
in the event of an exchange of Contract Value by written request or telephone
instructions, this option will terminate automatically. In either event, the
Contract Value in the Subaccounts that has not been exchanged will remain in
those Subaccounts regardless of the percentage allocation unless the
Contractowner instructs otherwise. If a Contractowner wishes to resume Asset
Rebalancing after it has been canceled, a new Asset Rebalancing Request form
must be completed and sent to the T. Rowe Price Variable Annuity Service
Center and the Contract Value at the time the request is made must be at least
$10,000 ($2,000 for a Contract funding a Qualified Plan). The Company may
discontinue, modify, or suspend the Asset Rebalancing Option at any time
provided that, as required by its current contractual arrangements with
Investment Services, the Company first obtains the consent of Investment
Services, which consent shall not be unreasonably withheld.
Contract Value allocated to the Fixed Interest Account may be included in the
Asset Rebalancing Program, subject to certain restrictions described under
"The Fixed Interest Account," page 28.
Exchanges of Contract Value
During the Accumulation Period, Contract Value may be exchanged among the
Subaccounts by the Contractowner upon proper written request to the T. Rowe
Price Variable Annuity Service Center. Exchanges (other than exchanges in
connection with the Dollar Cost Averaging or Asset Rebalancing Options) may be
made by telephone if an Authorization for Telephone Requests form has been
properly completed, signed and filed at the T. Rowe Price Variable Annuity
Service Center. Up to six exchanges are allowed in any Contract Year. The
minimum exchange amount is $500 ($200 under the Dollar Cost Averaging Option),
or the amount remaining in a given Subaccount.
Contract Value may also be exchanged between the Subaccounts and the Fixed
Interest Account; however, exchanges from the Fixed Interest Account to the
Subaccounts are restricted as described in "The Fixed Interest Account," page
28.
The Company reserves the right at a future date, to waive or limit the number
of exchanges permitted each Contract Year, to suspend exchanges, to limit the
amount that may be subject to exchanges and the amount remaining in an account
after an exchange, to impose conditions on the right to exchange and to
discontinue telephone exchanges provided that, as required by its current
contractual arrangements with Investment Services, the Company first obtains
the consent of Investment Services, which consent shall not be unreasonably
withheld.
Contract Value
The Contract Value is the sum of the amounts under the Contract held in each
Subaccount of the Separate Account and in the Fixed Interest Account as of any
Valuation Date.
On each Valuation Date, the portion of the Contract Value allocated to any
particular Subaccount will be adjusted to reflect the investment experience of
that Subaccount for that date. See "Determination of Contract Value," below.
No minimum amount of Contract Value is guaranteed. A Contractowner bears the
entire investment risk relating to the investment performance of Contract
Value allocated to the Subaccounts.
Determination of Contract Value
The Contract Value will vary to a degree that depends upon several factors,
including investment performance of the Subaccounts to which Contract Value
has been allocated, payment of subsequent purchase payments, partial
withdrawals, and the charges assessed in connection with the Contract. The
amounts allocated to the Subaccounts will be invested in shares of the
corresponding Portfolios of the Funds. The investment performance of the
Subaccounts will reflect increases or decreases in the net asset value per
share of the corresponding Portfolios and any dividends or distributions
declared by the corresponding Portfolios. Any dividends or distributions from
any Portfolio of the Funds will be automatically reinvested in shares of the
same Portfolio, unless the Company, on behalf of the Separate Account, elects
otherwise.
Assets in the Subaccounts are divided into Accumulation Units, which are
accounting units of measure used to calculate the value of a Contractowner's
interest in a Subaccount. When a Contractowner allocates purchase payments to
a Subaccount, the Contract is credited with Accumulation Units. The number of
Accumulation Units to be credited is determined by dividing the dollar amount
allocated to the particular Subaccount by the Accumulation Unit value for the
particular Subaccount at the end of the Valuation Period in which the purchase
payment is credited. In addition, other transactions including full or
partial withdrawals, exchanges, and assessment of premium taxes against the
Contract affect the number of Accumulation Units credited to a Contract. The
number of units credited or debited in connection with any such transaction is
determined by dividing the dollar amount of such transaction by the unit value
of the affected Subaccount. The Accumulation Unit value of each Subaccount is
determined on each Valuation Date. The number of Accumulation Units credited
to a Contract will not be changed by any subsequent change in the value of an
Accumulation Unit, but the dollar value of an Accumulation Unit may vary from
Valuation Date to Valuation Date depending upon the investment experience of
the Subaccount and charges against the Subaccount.
The Accumulation Unit value of each Subaccount's units initially was $10. The
unit value of a Subaccount on any Valuation Date is calculated by dividing the
value of each Subaccount's net assets by the number of Accumulation Units
credited to the Subaccount on that date. Determination of the value of the
net assets of a Subaccount takes into account the following: (1) the
investment performance of the Subaccount, which is based upon the investment
performance of the corresponding Portfolio of the Funds, (2) any dividends or
distributions paid by the corresponding Portfolio, (3) the charges, if any,
that may be assessed by the Company for taxes attributable to the operation of
the Subaccount, and (4) the mortality and expense risk charge under the
Contract.
Full and Partial Withdrawals
A Contractowner may obtain proceeds from a Contract by surrendering the
Contract for its Withdrawal Value or by making a partial withdrawal. A full
or partial withdrawal, including a systematic withdrawal, may be taken from
the Contract Value at any time while the Owner is living and before the
Annuity Payout Date, subject to restrictions on partial withdrawals of
Contract Value from the Fixed Interest Account and limitations under
applicable law. A full or partial withdrawal request will be effective as of
the end of the Valuation Period that a proper written request is received by
the Company at the T. Rowe Price Variable Annuity Service Center. A proper
written request must include the written consent of any effective assignee or
irrevocable Beneficiary, if applicable. A Contractowner may direct Investment
Services to apply the proceeds of a full or partial withdrawal to the purchase
of shares of one or more of the T. Rowe Price Funds by so indicating in their
written withdrawal request.
The proceeds received upon a full withdrawal will be the Contract's Withdrawal
Value. The Withdrawal Value is equal to the Contract Value as of the end of
the Valuation Period during which a proper withdrawal request is received by
the Company at the T. Rowe Price Variable Annuity Service Center, less any
premium taxes due and paid by the Company. A partial withdrawal may be
requested for a specified percentage or dollar amount of Contract Value. Each
partial withdrawal must be for at least $500 except systematic withdrawals
discussed on the next page. A request for a partial withdrawal will result in
a payment by the Company in accordance with the amount specified in the
partial withdrawal request. Upon payment, the Contract Value will be reduced
by an amount equal to the payment and any applicable premium tax. If a
partial withdrawal is requested that would leave the Withdrawal Value in the
Contract less than $2,000, then the Company reserves the right to treat the
partial withdrawal as a request for a full withdrawal.
The amount of a partial withdrawal will be deducted from the Contract Value in
the Subaccounts and the Fixed Interest Account, according to the
Contractowner's instructions to the Company, subject to the restrictions on
partial withdrawals from the Fixed Interest Account. See "The Fixed Interest
Account" on page 28. If a Contractowner does not specify the allocation, the
Company will contact the Contractowner for instructions, and the withdrawal
will be effected as of the end of the Valuation Period in which such
instructions are obtained. A full or partial withdrawal, including a
systematic withdrawal, may be subject to a premium tax charge to reimburse the
Company for any tax on premiums on a Contract that may be imposed by various
states and municipalities. See "Premium Tax Charge" on page 24.
A full or partial withdrawal, including a systematic withdrawal, may result in
receipt of taxable income to the Owner and, if made prior to the Owner
attaining age 59 1/2, may be subject to a 10% penalty tax. The tax
consequences of a withdrawal under the Contract should be carefully
considered. See "Federal Tax Matters" on page 32.
Systematic Withdrawals
The Company currently offers a feature under which systematic withdrawals may
be elected. Under this feature, a Contractowner may elect to receive
systematic withdrawals before the Annuity Payout Date by sending a properly
completed Systematic Withdrawal Request form to the Company at the T. Rowe
Price Variable Annuity Service Center. A Contractowner may direct Investment
Services to apply the proceeds of a systematic withdrawal to shares of one or
more of the T. Rowe Price Funds by so indicating on the Systematic Withdrawal
Request form. A proper request must include the written consent of any
effective assignee or irrevocable Beneficiary, if applicable. A Contractowner
may designate the systematic withdrawal amount as a percentage of Contract
Value allocated to the Subaccounts and/or Fixed Interest Account, as a
specified dollar amount, as all earnings in the Contract, or as based upon the
life expectancy of the Owner or the Owner and a Beneficiary, and the desired
frequency of the systematic withdrawals, which may be monthly, quarterly,
semiannually or annually. Systematic withdrawals may be stopped or modified
upon proper written request by the Contractowner received by the Company at
the T. Rowe Price Variable Annuity Service Center at least 30 days in advance
of the requested date of termination or modification.
Each systematic withdrawal must be at least $100. Upon payment, the
Contractowner's Contract Value will be reduced by an amount equal to the
payment proceeds plus any applicable premium taxes. Any systematic withdrawal
that equals or exceeds the Withdrawal Value will be treated as a full
withdrawal. In no event will payment of a systematic withdrawal exceed the
Withdrawal Value. The Contract will automatically terminate if a systematic
withdrawal causes the Contract's Withdrawal Value to equal zero.
Each systematic withdrawal will be effected as of the end of the Valuation
Period during which the withdrawal is scheduled. The deduction caused by the
systematic withdrawal will be allocated to the Contractowner's Contract Value
in the Subaccounts and the Fixed Interest Account as directed by the
Contractowner.
The Company may, at any time, discontinue, modify or suspend systematic
withdrawals provided that, as required by its current contractual arrangements
with Investment Services, the Company first obtains the consent of Investment
Services, which consent shall not be unreasonably withheld. Systematic
withdrawals from Contract Value allocated to the Fixed Interest Account must
provide for payments over a period of not less than 36 months as described
under "The Fixed Interest Account" on page 28. The tax consequences of a
systematic withdrawal, including the 10% penalty tax imposed on withdrawals
made prior to the Owner attaining age 59 1/2, should be carefully considered.
See "Federal Tax Matters" on page 32.
Free-Look Right
An Owner may return a Contract within the Free-Look Period, which is generally
a 10-day period beginning when the Owner receives the Contract. The returned
Contract will then be deemed void and the Company will refund any purchase
payments allocated to the Fixed Interest Account plus the Contract Value in
the Subaccounts as of the end of the Valuation Period during which the
returned Contract is received by the Company. The Company will return
purchase payments allocated to the Subaccounts rather than Contract Value in
those states and circumstances in which it is required to do so.
Death Benefit
If the Owner dies during the Accumulation Period, the Company will pay the
death benefit proceeds to the Designated Beneficiary upon receipt of due proof
of death and instructions regarding payment to the Designated Beneficiary. If
there are Joint Owners, the death benefit proceeds will be payable upon
receipt of due proof of death of either Owner during the Accumulation Period
and instructions regarding payment. If the surviving spouse of the deceased
Owner is the sole Designated Beneficiary, such spouse may elect to continue
the Contract in force, subject to certain limitations. See "Distribution
Requirements" on the next page. If the Owner is not a natural person, the
death benefit proceeds will be payable upon receipt of due proof of death of
the Annuitant during the Accumulation Period and instructions regarding
payment, and the amount of the death benefit is based on the age of the oldest
Annuitant on the date the Contract was issued. If the death of an Owner
occurs on or after the Annuity Payout Date, no death benefit proceeds will be
payable under the Contract, except that any guaranteed payments remaining
unpaid will continue to be paid to the Annuitant pursuant to the Annuity
Option in force at the date of death.
The death benefit proceeds will be the death benefit reduced by any premium
taxes due or paid by the Company. If an Owner dies during the Accumulation
Period and the age of each Owner was 75 or younger on the date the Contract
was issued, the amount of the death benefit will be the greatest of (1) the
Contract Value as of the end of the Valuation Period in which due proof of
death and instructions regarding payment are received by the Company at the T.
Rowe Price Variable Annuity Service Center, (2) the aggregate purchase
payments received less any reductions caused by previous withdrawals, or (3)
the stepped-up death benefit. The stepped-up death benefit is: (a) the
highest death benefit on any annual Contract anniversary that is both an exact
multiple of five and occurs prior to the oldest Owner attaining age 76, plus
(b) any purchase payments made since the applicable fifth annual Contract
anniversary, less (c) any withdrawals since the applicable anniversary.
If an Owner dies during the Accumulation Period and the Contract was issued to
the Owner after age 75, the amount of the death benefit will be the Contract
Value as of the end of the Valuation Period in which due proof of death and
instructions regarding payment are received by the Company at the T. Rowe
Price Variable Annuity Service Center.
Notwithstanding the foregoing, the death benefit for Contracts issued in
Florida, regardless of age at issue, is the greater of (1) the Contract Value
as of the end of the Valuation Period in which due proof of death and
instructions regarding payment are received at the T. Rowe Price Variable
Annuity Service Center, or (2) the aggregate purchase payments received less
any reductions caused by previous withdrawals.
The death benefit proceeds will be paid to the Designated Beneficiary in a
single sum or under one of the Annuity Options, as elected by the Designated
Beneficiary. If the Designated Beneficiary is to receive annuity payments
under an Annuity Option, there may be limits under applicable law on the
amount and duration of payments that the Beneficiary may receive, and
requirements respecting timing of payments. A tax adviser should be consulted
in considering Annuity Options. See "Federal Tax Matters," on page 32 for a
discussion of the tax consequences in the event of death.
Distribution Requirements
For Contracts issued in connection with Non-Qualified Plans, if the surviving
spouse of the deceased Owner is the sole Designated Beneficiary, such spouse
may elect to continue the Contract in force until the earlier of the surviving
spouse's death or the Annuity Payout Date or to receive the death benefit
proceeds. For any Designated Beneficiary other than a surviving spouse, only
those options may be chosen that provide for complete distribution of the
Owner's interest in the Contract within five years of the death of the Owner.
If the Designated Beneficiary is a natural person, that person alternatively
can elect to begin receiving annuity payments within one year of the Owner's
death over a period not extending beyond his or her life or life expectancy.
If the Owner of the Contract is not a natural person, these distribution rules
are applicable upon the death of or a change in the primary Annuitant.
For Contracts issued in connection with Qualified Plans, the terms of any
Qualified Plan and the Internal Revenue Code should be reviewed with respect
to limitations or restrictions on distributions following the death of the
Owner or Annuitant. Because the rules applicable to Qualified Plans are
extremely complex, a competent tax adviser should be consulted.
Death of the Annuitant
If the Annuitant dies prior to the Annuity Payout Date, and the Owner is a
natural person and is not the Annuitant, no death benefit proceeds will be
payable under the Contract. The Owner may name a new Annuitant within 30 days
of the Annuitant's death. If a new Annuitant is not named, the Company will
designate the Owner as Annuitant. On the death of the Annuitant after the
Annuity Payout Date, any guaranteed payments remaining unpaid will continue to
be paid to the Designated Beneficiary pursuant to the Annuity Option in force
at the date of death.
__________________________________________________________________________
CHARGES AND DEDUCTIONS
Mortality and Expense Risk Charge
The Company deducts a daily charge from the assets of each Subaccount for
mortality and expense risks assumed by the Company under the Contracts. The
charge is equal to an annual rate of .55% of each Subaccount's average daily
net assets. This amount is intended to compensate the Company for certain
mortality and expense risks the Company assumes in offering and administering
the Contracts and in operating the Subaccounts.
The expense risk borne by the Company is the risk that the Company's actual
expenses in issuing and administering the Contracts and operating the
Subaccounts will be more than the profit realized from the mortality and
expense risk charge. The mortality risk borne by the Company is the risk that
Annuitants, as a group, will live longer than the Company's actuarial tables
predict. In this event, the Company guarantees that annuity payments will not
be affected by a change in mortality experience that results in the payment of
greater annuity income than assumed under the Annuity Options in the Contract.
The Company also assumes a mortality risk in connection with the death benefit
under the Contract.
The Company may ultimately realize a profit from this charge to the extent it
is not needed to cover mortality and administrative expenses, but the Company
may realize a loss to the extent the charge is not sufficient. The Company
may use any profit derived from this charge for any lawful purpose, including
any promotional and administrative expenses, including compensation paid by
the Company to T. Rowe Price Insurance Agency, Inc. at the annual rate of .10%
of each Subaccount's average daily net assets for administrative services.
Premium Tax Charge
Various states and municipalities impose a tax on premiums on annuity
contracts received by insurance companies. Whether or not a premium tax is
imposed will depend upon, among other things, the Owner's state of residence,
the Annuitant's state of residence, and the insurance tax laws and the
Company's status in a particular state. The Company assesses a premium tax
charge to reimburse itself for premium taxes that it incurs in connection with
a Contract. This charge will be deducted upon annuitization, upon full or
partial withdrawal, or upon payment of the death benefit, if premium taxes are
incurred at that time and are not refundable. The Company reserves the right
to deduct premium taxes when due or anytime thereafter. Premium tax rates
currently range from 0% to 3.5%, but are subject to change by a governmental
entity.
Other Charges
The Company may charge the Separate Account or the Subaccounts for the
federal, state, or local taxes incurred by the Company that are attributable
to the Separate Account or the Subaccounts, or to the operations of the
Company with respect to the Contracts, or that are attributable to payment of
premiums or acquisition costs under the Contracts. No such charge is
currently assessed. See "Tax Status of the Company and the Separate Account"
and "Charge for the Company's Taxes."
Guarantee of Certain Charges
The Company guarantees that the charge for mortality and expense risks will
not exceed an annual rate of .55% of each Subaccount's average daily net
assets.
Fund Expenses
Each Subaccount of the Separate Account purchases shares at the net asset
value of the corresponding Portfolio of the Funds. Each Portfolio's net asset
value reflects the investment management fee and any other expenses that are
deducted from the assets of the Fund. These fees and expenses are not
deducted from the Subaccount, but are paid from the assets of the
corresponding Portfolio. As a result, the Owner indirectly bears a pro rata
portion of such fees and expenses. The management fees and other expenses, if
any, which are more fully described in the Funds' prospectus, are not
specified or fixed under the terms of the Contract and the Company bears no
responsibility for such fees and expenses.
__________________________________________________________________________
ANNUITY PERIOD
General
The Contractowner may select the Annuity Payout Date at the time of
application. The Annuity Payout Date may not be deferred beyond the
Annuitant's 90th birthday, although the terms of a Qualified Plan and the laws
of certain states may require annuitization at an earlier age. If the
Contractowner does not select an Annuity Payout Date, the Annuity Payout Date
will be the later of the Annuitant's 70th birthday or the tenth annual
Contract Anniversary. See "Selection of an Option," on page 27. If there are
Joint Annuitants, the birth date of the older Annuitant will be used to
determine the latest Annuity Payout Date.
On the Annuity Payout Date, the proceeds under the Contract will be applied to
provide an annuity under one of the options described on the next page. Each
option is available in two forms-either as a variable annuity supported by the
Subaccounts or as a fixed annuity supported by the Fixed Interest Account. A
combination variable and fixed annuity is also available. Variable annuity
payments will fluctuate with the investment performance of the applicable
Subaccounts while fixed annuity payments will not. Unless the Owner directs
otherwise, proceeds derived from Contract Value allocated to the Subaccounts
will be applied to purchase a variable annuity and proceeds derived from
Contract Value allocated to the Fixed Interest Account will be applied to
purchase a fixed annuity. The proceeds under the Contract will be equal to
the Contractowner's Contract Value in the Subaccounts and the Fixed Interest
Account as of the Annuity Payout Date, reduced by any applicable premium
taxes.
The Contract provides for seven Annuity Options. Other Annuity Options may be
available upon request at the discretion of the Company. Annuity payments
under Annuity Options 1 through 4 are based upon annuity rates that vary with
the Annuity Option selected. In the case of Options 1 through 4, the annuity
rates will vary based on the age and sex of the Annuitant, except that unisex
rates are used where required by law. In the case of Options 5, 6 and 7 as
described on the next page, annuity rates based on age and sex are not used to
calculate annuity payments. The annuity rates are based upon an assumed
interest rate of 3.5 percent, compounded annually. If no Annuity Option has
been selected, annuity payments will be made to the Annuitant under Option 2
which shall be an annuity payable monthly during the lifetime of the Annuitant
with payments guaranteed to be made for 120 months.
Annuity payments can be made on a monthly, quarterly, semiannual, or annual
basis, although no payments will be made for less than $100. A Contractowner
may direct Investment Services to apply the proceeds of an annuity payment to
shares of one or more of the T. Rowe Price Funds by submitting a written
request to the T. Rowe Price Variable Annuity Service Center. If the
frequency of payments selected would result in payments of less than $100, the
Company reserves the right to change the frequency.
An Owner may designate or change an Annuity Payout Date, Annuity Option, and
Annuitant, provided proper written notice is received by the Company at the T.
Rowe Price Variable Annuity Service Center at least 30 days prior to the
Annuity Payout Date set forth in the Contract. The date selected as the new
Annuity Payout Date must be at least 30 days after the date written notice
requesting a change of Annuity Payout Date is received at the T. Rowe Price
Variable Annuity Service Center.
Once annuity payments have commenced under Annuity Options 1, 2, 3 or 4, an
Annuitant or Owner cannot change the Annuity Option and cannot surrender his
or her annuity and receive a lump-sum settlement in lieu thereof. The
Contract specifies annuity tables for Annuity Options 1 through 4 described
below and on the following page which contain the guaranteed minimum dollar
amount of periodic annuity payments for each $1,000 applied to an Annuity
Option for a fixed annuity.
Annuity Options
Option 1 - Life Income Periodic annuity payments will be made during the
lifetime of the Annuitant. It is possible under this Option for any Annuitant
to receive only one annuity payment if the Annuitant's death occurred prior to
the due date of the second annuity payment, two if death occurred prior to the
third annuity payment due date, etc. THERE IS NO MINIMUM NUMBER OF PAYMENTS
GUARANTEED UNDER THIS OPTION. PAYMENTS CEASE UPON THE DEATH OF THE ANNUITANT,
REGARDLESS OF THE NUMBER OF PAYMENTS RECEIVED.
Option 2 - Life Income with Guaranteed Payments of 5, 10, 15 or 20 Years
Periodic annuity payments will be made during the lifetime of the Annuitant
with the promise that if, at the death of the Annuitant, payments have been
made for less than a stated period, which may be 5, 10, 15, or 20 years, as
elected, annuity payments will be continued during the remainder of such
period to the Designated Beneficiary.
Option 3 - Life with Installment or Unit Refund Option Periodic annuity
payments will be made during the lifetime of the Annuitant with the promise
that, if at the death of the Annuitant, the number of payments that has been
made is less than the number determined by dividing the amount applied under
this Option by the amount of the first payment, annuity payments will be
continued to the Designated Beneficiary until that number of payments has been
made.
Option 4 - Joint and Last Survivor Periodic annuity payments will be made
during the lifetime of either Annuitant. It is possible under this Option for
only one annuity payment to be made if both Annuitants died prior to the
second annuity payment due date, two if both died prior the third annuity
payment due date, etc. AS IN THE CASE OF OPTION 1, THERE IS NO MINIMUM NUMBER
OF PAYMENTS GUARANTEED UNDER THIS OPTION. PAYMENTS CEASE UPON THE DEATH OF
THE LAST SURVIVING ANNUITANT, REGARDLESS OF THE NUMBER OF PAYMENTS RECEIVED.
Option 5 - Payments for Specified Period Periodic annuity payments will be
made for a fixed period, which may be from 5 to 20 years, as elected, with the
guarantee that, if, at the death of all Annuitants, payments have been made
for less than the selected fixed period, the remaining unpaid payments will be
paid to the Designated Beneficiary.
Option 6 - Payments of a Specified Amount Periodic payments of the amount
elected will be made until the amount applied and interest thereon are
exhausted, with the guarantee that, if, at the death of all Annuitants, all
guaranteed payments have not yet been made, the remaining unpaid payments will
be paid to the Designated Beneficiary.
Option 7 - Age Recalculation Periodic annuity payments will be made based upon
the Annuitant's life expectancy, or the joint life expectancies of the
Annuitant and a beneficiary, at the Annuitant's attained age (and the
beneficiary's attained or adjusted age, if applicable) each year. The
payments are computed by reference to actuarial tables prescribed by the
Treasury Secretary, until the amount applied is exhausted. This option should
be elected only under Contracts funding Qualified Plans.
Selection of an Option
Contractowners should carefully review the Annuity Options with their
financial or tax advisers, and, for Contracts used in connection with a
Qualified Plan, reference should be made to the terms of the particular plan
and the requirements of the Internal Revenue Code for pertinent limitations
respecting annuity payments and other matters. For instance, Qualified Plans
generally require that annuity payments begin no later than April 1 of the
calendar year following the year in which the Annuitant reaches age 70 1/2.
In addition, under Qualified Plans, the period elected for receipt of annuity
payments under Annuity Options (other than life income) generally may be no
longer than the joint life expectancy of the Annuitant and Beneficiary in the
year that the Annuitant reaches age 70 1/2, and must be shorter than such
joint life expectancy if the Beneficiary is not the Annuitant's spouse and is
more than 10 years younger than the Annuitant. For Non-Qualified Plans, the
Company does not allow annuity payments to be deferred beyond the Annuitant's
90th birthday.
__________________________________________________________________________
THE FIXED INTEREST ACCOUNT
Contractowners may allocate all or a portion of their purchase payments and
exchange Contract Value to the Fixed Interest Account. Amounts allocated to
the Fixed Interest Account become part of the Company's General Account, which
supports the Company's insurance and annuity obligations. The Company's
General Account is subject to regulation and supervision by the Kansas
Department of Insurance and is also subject to the insurance laws and
regulations of other jurisdictions in which the Contract is distributed. In
reliance on certain exemptive and exclusionary provisions, interests in the
Fixed Interest Account have not been registered as securities under the
Securities Act of 1933 (the "1933 Act") and the Fixed Interest Account has not
been registered as an investment company under the Investment Company Act of
1940 (the "1940 Act"). Accordingly, neither the Fixed Interest Account nor
any interests therein are generally subject to the provisions of the 1933 Act
or the 1940 Act. The Company has been advised that the staff of the SEC has
not reviewed the disclosure in this Prospectus relating to the Fixed Interest
Account. This disclosure, however, may be subject to certain generally
applicable provisions of the federal securities laws relating to the accuracy
and completeness of statements made in the Prospectus. This Prospectus is
generally intended to serve as a disclosure document only for aspects of a
Contract involving the Separate Account and contains only selected information
regarding the Fixed Interest Account. For more information regarding the
Fixed Interest Account, see "The Contract" on page 14.
Amounts allocated to the Fixed Interest Account become part of the General
Account of the Company, which consists of all assets owned by the Company
other than those in the Separate Account and other separate accounts of the
Company. Subject to applicable law, the Company has sole discretion over the
investment of the assets of its General Account.
Interest
Amounts allocated to the Fixed Interest Account earn interest at a fixed rate
or rates that are paid by the Company. The Contract Value in the Fixed
Interest Account earns interest at an interest rate that is guaranteed to be
at least an annual effective rate of 3% which will accrue daily ("Guaranteed
Rate"). Such interest will be paid regardless of the actual investment
experience of the Company's General Account. In addition, the Company may in
its discretion pay interest at a rate ("Current Rate") that exceeds the
Guaranteed Rate. The Company will determine the Current Rate, if any, from
time to time.
Contract Value allocated or exchanged to the Fixed Interest Account will earn
interest at the Current Rate, if any, in effect on the date such portion of
Contract Value is allocated or exchanged to the Fixed Interest Account. The
Current Rate paid on any such portion of Contract Value allocated or exchanged
to the Fixed Interest Account will be guaranteed for rolling periods of one or
more years (each a "Guarantee Period"). The Company currently offers only
Guarantee Periods of one year. Upon expiration of any Guarantee Period, a new
Guarantee Period of the same duration begins with respect to that portion of
Contract Value, which will earn interest at the Current Rate, if any, declared
by the Company on the first day of the new Guarantee Period.
Contract Value allocated or exchanged to the Fixed Interest Account at one
point in time may be credited with a different Current Rate than amounts
allocated or exchanged to the Fixed Interest Account at another point in time.
For example, amounts allocated to the Fixed Interest Account in June may be
credited with a different current rate than amounts allocated to the Fixed
Interest Account in July. In addition, if Guarantee Periods of different
durations are offered, Contract Value allocated or exchanged to the Fixed
Interest Account for a Guarantee Period of one duration may be credited with a
different Current Rate than amounts allocated or exchanged to the Fixed
Interest Account for a Guarantee Period of a different duration. Therefore,
at any time, various portions of a Contractowner's Contract Value in the Fixed
Interest Account may be earning interest at different Current Rates depending
upon the point in time such portions were allocated or exchanged to the Fixed
Interest Account and the duration of the Guarantee Period. The Company bears
the investment risk for the Contract Value allocated to the Fixed Interest
Account and for paying interest at the Guaranteed Rate on amounts allocated to
the Fixed Interest Account.
For purposes of determining the interest rates to be credited on Contract
Value in the Fixed Interest Account, withdrawals or exchanges from the Fixed
Interest Account will be deemed to be taken first from any portion of Contract
Value allocated to the Fixed Interest Account for which the Guarantee Period
expires during the calendar month in which the withdrawal, loan or exchange is
effected, then in the order beginning with that portion of such Contract Value
which has the longest amount of time remaining before the end of its Guarantee
Period and ending with that portion which has the least amount of time
remaining before the end of its Guarantee Period. For more information about
exchanges and withdrawals from the Fixed Interest Account, see "Exchanges and
Withdrawals" on the following page.
Death Benefit
The death benefit under the Contract will be determined in the same fashion
for a Contract that has Contract Value in the Fixed Interest Account as for a
Contract that has Contract Value allocated to the Subaccounts. See "Death
Benefit," page 22.
Contract Charges
Premium taxes will be the same for Contractowners who allocate purchase
payments or exchange Contract Value to the Fixed Interest Account as for those
who allocate purchase payments to the Subaccounts. The charge for mortality
and expense risks will not be assessed against the Fixed Interest Account, and
any amounts that the Company pays for income taxes allocable to the
Subaccounts will not be charged against the Fixed Interest Account. In
addition, the investment management fees and any other expenses paid by the
Funds will not be paid directly or indirectly by Contractowners to the extent
the Contract Value is allocated to the Fixed Interest Account; however, such
Contractowners will not participate in the investment experience of the
Subaccounts.
Exchanges and Withdrawals
Amounts may be exchanged from the Subaccounts to the Fixed Interest Account
and from the Fixed Interest Account to the Subaccounts, subject to the
following limitations. Exchanges from the Fixed Interest Account are allowed
only (1) from Contract Value, the Guarantee Period of which expires during the
calendar month in which the exchange is effected, (2) pursuant to the Dollar
Cost Averaging Option provided that such exchanges are scheduled to be made
over a period of not less than one year, and (3) pursuant to the Asset
Rebalancing Option, provided that upon receipt of the Asset Rebalancing
Request, Contract Value is allocated among the Fixed Interest Account and the
Subaccounts in the percentages selected by the Contractowner without violating
the restrictions on exchanges from the Fixed Interest Account set forth in (1)
above. Accordingly, a Contractowner who desires to implement the Asset
Rebalancing Option should do so at a time when Contract Value may be exchanged
from the Fixed Interest Account to the Subaccounts in the percentages selected
by the Contractowner without violating the restrictions on exchanges from the
Fixed Interest Account. Once an Asset Rebalancing Option is implemented, the
restrictions on exchanges will not apply to exchanges made pursuant to the
Option. Up to six exchanges are allowed in any Contract Year and exchanges
pursuant to the Dollar Cost Averaging and Asset Rebalancing Options are not
included in the six exchanges allowed per Contract Year. The minimum exchange
amount is $500 ($200 under the Dollar Cost Averaging Option) or the amount
remaining in the Fixed Interest Account. The Company reserves the right to
waive or limit the number of exchanges permitted each Contract Year, to
suspend exchanges, to limit the amount that may be subject to exchanges and
the amount remaining in an account after an exchange and to impose conditions
on the right to exchange.
If Contract Value is being exchanged from the Fixed Interest Account pursuant
to the Dollar Cost Averaging or Asset Rebalancing Options or withdrawn from
the Fixed Interest Account pursuant to systematic withdrawals, any purchase
payment allocated to, or Contract Value exchanged to or from, the Fixed
Interest Account will automatically terminate such Dollar Cost Averaging or
Asset Rebalancing Option, or systematic withdrawals and any withdrawal from
the Fixed Interest Account or the Subaccounts will automatically terminate the
Asset Rebalancing Option. In the event of automatic termination of any of the
foregoing options, the Company shall so notify the Contractowner, and the
Contractowner may reestablish Dollar Cost Averaging, Asset Rebalancing or
Systematic Withdrawals by sending a written request to the Company, provided
that the Owner's Contract Value at that time meets any minimum amount required
for the Dollar Cost Averaging or Asset Rebalancing Option.
The Contractowner may also make full withdrawals to the same extent as a
Contractowner who has allocated Contract Value to the Subaccounts. A
Contractowner may make a partial withdrawal from the Fixed Interest Account
only (1) from Contract Value, the Guarantee Period of which expires during the
calendar month in which the partial withdrawal is effected, (2) pursuant to
Systematic Withdrawals, and (3) once per Contract Year in an amount up to the
greater of $5,000 or 10 percent of Contract Value at the time of the partial
withdrawal. Systematic Withdrawals from Contract Value allocated to the Fixed
Interest Account must provide for payments over a period of not less than 36
months. See "Full and Partial Withdrawals," page 20 and "Systematic
Withdrawals," page 21.
Payments from the Fixed Interest Account
As required by most states, the Company reserves the right to delay for up to
six months after a written request in proper form is received by the Company
at the T. Rowe Price Variable Annuity Service Center, full and partial
withdrawals and exchanges from the Fixed Interest Account. During the period
of deferral, interest at the applicable interest rate or rates will continue
to be credited to the amounts allocated to the Fixed Interest Account. The
Company does not expect to delay payments from the Fixed Interest Account and
will notify the Contractowner if there will be a delay.
__________________________________________________________________________
MORE ABOUT THE CONTRACT
Ownership
The Contractowner is the person named as such in the application or in any
later change shown in the Company's records. While living, the Contractowner
alone has the right to receive all benefits and exercise all rights that the
Contract grants or the Company allows. The Owner may be an entity that is not
a living person, such as a trust or corporation, referred to herein as
"Non-Natural Persons." See "Federal Tax Matters," page 32.
Joint Owners. The Joint Owners will be joint tenants with rights of
survivorship and upon the death of an Owner, the surviving Owner shall be the
sole Owner. Any Contract transaction requires the signature of all persons
named jointly.
Designation and Change of Beneficiary
The Beneficiary is the individual named as such in the application or any
later change shown in the Company's records. The Contractowner may change the
Beneficiary at any time while the Contract is in force by written request on a
form provided by the Company and received by the Company at the T. Rowe Price
Variable Annuity Service Center. The change will not be binding on the
Company until it is received and recorded at the T. Rowe Price Variable
Annuity Service Center. The change will be effective as of the date this form
is signed subject to any payments made or other actions taken by the Company
before the change is received and recorded. A Secondary Beneficiary may be
designated. The Owner may designate a permanent Beneficiary whose rights
under the Contract cannot be changed without the Beneficiary's consent.
Participating
The Contract is participating and will share in the surplus earnings of the
Company. However, the current dividend scale is zero and the Company does not
anticipate that dividends will be paid.
Payments from the Separate Account
The Company will pay any full or partial withdrawal benefit or death benefit
proceeds from Contract Value allocated to the Subaccounts, and will effect an
exchange between Subaccounts or from a Subaccount to the Fixed Interest
Account within seven days from the Valuation Date a proper request is received
at the T. Rowe Price Variable Annuity Service Center. However, the Company
can postpone the calculation or payment of such a payment or exchange of
amounts from the Subaccounts to the extent permitted under applicable law, for
any period: (a) during which the New York Stock Exchange is closed other than
customary weekend and holiday closings, (b) during which trading on the New
York Stock Exchange is restricted as determined by the SEC, or (c) during
which an emergency, as determined by the SEC, exists as a result of which (i)
disposal of securities held by the Separate Account is not reasonably
practicable, or (ii) it is not reasonably practicable to determine the value
of the assets of the Separate Account.
Proof of Age and Survival
The Company may require proof of age or survival of any person on whose life
annuity payments depend.
Misstatements
If the age or sex of an Annuitant or age of an Owner has been misstated, the
correct amount paid or payable by the Company under the Contract shall be such
as the Contract Value would have provided for the correct age or sex (unless
unisex rates apply).
__________________________________________________________________________
FEDERAL TAX MATTERS
Introduction
The Contract described in this Prospectus is designed for use by individuals
in retirement plans which may or may not be Qualified Plans under the
provisions of the Internal Revenue Code ("Code"). The ultimate effect of
federal income taxes on the amounts held under a Contract, on annuity
payments, and on the economic benefits to the Owner, the Annuitant, and the
Beneficiary or other payee will depend upon the type of retirement plan for
which the Contract is purchased, the tax and employment status of the
individuals involved and a number of other factors. The discussion of the
federal income tax considerations relating to a contract contained herein and
in the Statement of Additional Information is general in nature and is not
intended to be an exhaustive discussion of all questions that might arise in
connection with a Contract. It is based upon the Company's understanding of
the present federal income tax laws as currently interpreted by the Internal
Revenue Service ("IRS"), and is not intended as tax advice. No representation
is made regarding the likelihood of continuation of the present federal income
tax laws or of the current interpretations by the IRS or the courts. Future
legislation may affect annuity contracts adversely. Moreover, no attempt has
been made to consider any applicable state or other laws. Because of the
inherent complexity of the tax laws and the fact that tax results will vary
according to the particular circumstances of the individual involved and, if
applicable, the Qualified Plan, a person should consult a qualified tax
adviser regarding the purchase of a Contract, the selection of an Annuity
Option under a Contract, the receipt of annuity payments under a Contract or
any other transaction involving a Contract (including an exchange). THE
COMPANY DOES NOT MAKE ANY GUARANTEE REGARDING THE TAX STATUS OF, OR TAX
CONSEQUENCES ARISING FROM, ANY CONTRACT OR ANY TRANSACTION INVOLVING THE
CONTRACT.
Tax Status of the Company and the Separate Account
General
The Company intends to be taxed as a life insurance company under Part I,
Subchapter L of the Code. Because the operations of the Separate Account form
a part of the Company, the Company will be responsible for any federal income
taxes that become payable with respect to the income of the Separate Account
and its Subaccounts.
Charge for the Company's Taxes
A charge may be made against the Separate Account for any federal taxes
incurred by the Company that are attributable to the Separate Account, the
Subaccounts or to the operations of the Company with respect to the Contracts
or attributable to payments, premiums, or acquisition costs under the
Contracts. The Company will review the question of a charge to the Separate
Account, the Subaccounts or the Contracts for the Company's federal taxes
periodically. Charges may become necessary if, among other reasons, the tax
treatment of the Company or of income and expenses under the Contracts is
ultimately determined to be other than what the Company currently believes it
to be, if there are changes made in the federal income tax treatment of
variable annuities at the insurance company level, or if there is a change in
the Company's tax status.
Under current laws, the Company may incur state and local taxes (in addition
to premium taxes) in several states. At present, these taxes are not
significant. If there is a material change in applicable state or local tax
laws, the Company reserves the right to charge the Separate Account or the
Subaccounts for such taxes, if any, attributable to the Separate Account or
Subaccounts.
Diversification Standards
Each of the Portfolios will be required to adhere to regulations adopted by
the Treasury Department pursuant to Section 817(h) of the Code prescribing
asset diversification requirements for investment companies whose shares are
sold to insurance company separate accounts funding variable contracts.
Pursuant to these regulations, on the last day of each calendar quarter (or on
any day within 30 days thereafter), no more than 55% of the total assets of a
Portfolio may be represented by any one investment, no more than 70% may be
represented by any two investments, no more than 80% may be represented by any
three investments, and no more than 90% may be represented by any four
investments. For purposes of Section 817(h), securities of a single issuer
generally are treated as one investment, but obligations of the U.S. Treasury
and each U.S. Governmental agency or instrumentality generally are treated as
securities of separate issuers. The Separate Account, through the Portfolios,
intends to comply with the diversification requirements of Section 817(h).
In certain circumstances, owners of variable annuity contracts may be
considered the owners, for federal income tax purposes, of the assets of the
separate account used to support their contracts. In those circumstances,
income and gains from the separate account assets would be includible in the
variable contractowner's gross income. The IRS has stated in published
rulings that a variable contractowner will be considered the owner of separate
account assets if the contractowner possesses incidents of ownership in those
assets, such as the ability to exercise investment control over the assets.
The Treasury Department also announced, in connection with the issuance of
regulations concerning diversification, that those regulations "do not provide
guidance concerning the circumstances in which investor control of the
investments of a segregated asset account may cause the investor (i.e., the
policyowner), rather than the insurance company, to be treated as the owner of
the assets in the account." This announcement also stated that guidance would
be issued by way of regulations or rulings on the "extent to which
policyholders may direct their investments to particular subaccounts without
being treated as owners of the underlying assets." As of the date of this
Prospectus, no such guidance has been issued.
The ownership rights under the Contract are similar to, but different in
certain respects from, those described by the IRS in rulings in which it was
determined that policyowners were not owners of separate account assets. For
example, the Contractowner has additional flexibility in allocating purchase
payments and Contract Values. These differences could result in a
Contractowner being treated as the owner of a pro rata portion of the assets
of the Separate Account. In addition, the Company does not know what
standards will be set forth, if any, in the regulations or rulings which the
Treasury Department has stated it expects to issue. The Company therefore
reserves the right to modify the Contract, as deemed appropriate by the
Company, to attempt to prevent a Contractowner from being considered the owner
of a pro rata share of the assets of the Separate Account. Moreover, in the
event that regulations or rulings are adopted, there can be no assurance that
the Portfolios will be able to operate as currently described in the
Prospectus, or that the Funds will not have to change any Portfolio's
investment objective or investment policies.
Income Taxation of Annuities in General - Non-Qualified Plans
Section 72 of the Code governs the taxation of annuities. In general, a
contractowner is not taxed on increases in value under an annuity contract
until some form of distribution is made under the contract. However, the
increase in value may be subject to tax currently under certain circumstances.
See "Contracts Owned by Non-Natural Persons" on page 36 and "Diversification
Standards" on page 33. Withholding of federal income taxes on all
distributions may be required unless a recipient who is eligible elects not to
have any amounts withheld and properly notifies the Company of that election.
o Surrenders or Withdrawals Prior to the Annuity Payout Date Code Section
72 provides that amounts received upon a total or partial withdrawal
(including systematic withdrawals) from a Contract prior to the Annuity
Payout Date generally will be treated as gross income to the extent that
the cash value of the Contract (determined without regard to any
surrender charge in the case of a partial withdrawal) exceeds the
"investment in the contract." The "investment in the contract" is that
portion, if any, of purchase payments paid under a Contract less any
distributions received previously under the Contract that are excluded
from the recipient's gross income. The taxable portion is taxed at
ordinary income tax rates. For purposes of this rule, a pledge or
assignment of a Contract is treated as a payment received on account of a
partial withdrawal of a Contract. Similarly, loans under a Contract are
generally treated as distributions under the Contract.
o Surrenders or Withdrawals on or after the Annuity Payout Date Upon a
complete surrender, the receipt is taxable to the extent that the cash
value of the Contract exceeds the investment in the Contract. The
taxable portion of such payments will be taxed at ordinary income tax
rates.
For fixed annuity payments, the taxable portion of each payment generally
is determined by using a formula known as the "exclusion ratio," which
establishes the ratio that the investment in the Contract bears to the
total expected amount of annuity payments for the term of the Contract.
That ratio is then applied to each payment to determine the non-taxable
portion of the payment. The remaining portion of each payment is taxed
at ordinary income rates. For variable annuity payments, the taxable
portion of each payment is determined by using a formula known as the
"excludable amount," which establishes the non-taxable portion of each
payment. The non-taxable portion is a fixed dollar amount for each
payment, determined by dividing the investment in the Contract by the
number of payments to be made. The remainder of each variable annuity
payment is taxable. Once the excludable portion of annuity payments to
date equals the investment in the Contract, the balance of the annuity
payments will be fully taxable.
o Penalty Tax on Certain Surrenders and Withdrawals With respect to amounts
withdrawn or distributed before the taxpayer reaches age 59 1/2, a
penalty tax is generally imposed equal to 10% of the portion of such
amount which is includible in gross income. However, the penalty tax is
not applicable to withdrawals: (i) made on or after the death of the
owner (or where the owner is not an individual, the death of the "primary
annuitant," who is defined as the individual the events in whose life are
of primary importance in affecting the timing and amount of the payout
under the Contract); (ii) attributable to the taxpayer's becoming totally
disabled within the meaning of Code Section 72(m)(7); (iii) which are
part of a series of substantially equal periodic payments (not less
frequently than annually) made for the life (or life expectancy) of the
taxpayer, or the joint lives (or joint life expectancies) of the taxpayer
and his or her beneficiary; (iv) from certain qualified plans; (v) under
a so-called qualified funding asset (as defined in Code Section 130(d));
(vi) under an immediate annuity contract; or (vii) which are purchased by
an employer on termination of certain types of qualified plans and which
are held by the employer until the employee separates from service.
If the penalty tax does not apply to a surrender or withdrawal as a
result of the application of item (iii) above, and the series of payments
are subsequently modified (other than by reason of death or disability),
the tax for the first year in which the modification occurs will be
increased by an amount (determined by the regulations) equal to the tax
that would have been imposed but for item (iii) above, plus interest for
the deferral period, if the modification takes place (a) before the close
of the period which is five years from the date of the first payment and
after the taxpayer attains age 59 1/2, or (b) before the taxpayer reaches
age 59 1/2.
Additional Considerations
o Distribution-at-Death Rules In order to be treated as an annuity
contract, a Contract must provide the following two distribution rules:
(a) if any owner dies on or after the Annuity Payout Date, and before the
entire interest in the Contract has been distributed, the remainder of
the owner's interest will be distributed at least as quickly as the
method in effect on the owner's death; and (b) if any owner dies before
the Annuity Payout Date, the entire interest in the Contract must
generally be distributed within five years after the date of death, or,
if payable to a designated beneficiary, must be annuitized over the life
of that designated beneficiary or over a period not extending beyond the
life expectancy of that beneficiary, commencing within one year after the
date of death of the owner. If the sole designated beneficiary is the
spouse of the deceased owner, the Contract (together with the deferral of
tax on the accrued and future income thereunder) may be continued in the
name of the spouse as owner.
Generally, for purposes of determining when distributions must begin
under the foregoing rules, where an owner is not an individual, the
primary annuitant is considered the owner. In that case, a change in the
primary annuitant will be treated as the death of the owner. Finally, in
the case of joint owners, the distribution-at-death rules will be applied
by treating the death of the first owner as the one to be taken into
account in determining generally when distributions must commence, unless
the sole Beneficiary is the deceased owner's spouse.
o Gift of Annuity Contracts Generally, gifts of Non-Qualified Plan
Contracts prior to the Annuity Payout Date will trigger tax on the gain
on the Contract, with the donee getting a stepped-up basis for the amount
included in the donor's income. The 10% penalty tax and gift tax also
may be applicable. This provision does not apply to transfers between
spouses or incident to a divorce.
o Contracts Owned by Non-Natural Persons If the Contract is held by a
non-natural person (for example, a corporation), the income on that
Contract (generally the increase in net surrender value less the purchase
payments) is includible in taxable income each year. The rule does not
apply where the Contract is acquired by the estate of a decedent, where
the Contract is held by certain types of retirement plans, where the
Contract is a qualified funding asset for structured settlements, where
the Contract is purchased on behalf of an employee upon termination of a
qualified plan, and in the case of a so-called immediate annuity. An
annuity contract held by a trust or other entity as agent for a natural
person is considered held by a natural person.
o Multiple Contract Rule For purposes of determining the amount of any
distribution under Code Section 72(e) (amounts not received as annuities)
that is includible in gross income, all Non-Qualified annuity contracts
issued by the same insurer to the same Contractowner during any calendar
year are to be aggregated and treated as one contract. Thus, any amount
received under any such contract prior to the contract's Annuity Payout
Date, such as a partial withdrawal, dividend, or loan, will be taxable
(and possibly subject to the 10% penalty tax) to the extent of the
combined income in all such contracts.
In addition, the Treasury Department has broad regulatory authority in
applying this provision to prevent avoidance of the purposes of this
rule. It is possible that, under this authority, the Treasury Department
may apply this rule to amounts that are paid as annuities (on and after
the Annuity Payout Date) under annuity contracts issued by the same
company to the same owner during any calendar year. In this case,
annuity payments could be fully taxable (and possibly subject to the 10%
penalty tax) to the extent of the combined income in all such contracts
and regardless of whether any amount would otherwise have been excluded
from income because of the "exclusion ratio" under the contract.
o Possible Tax Changes In recent years, legislation has been proposed that
would have adversely modified the federal taxation of certain annuities.
Although as of the date of this prospectus Congress is not considering
any legislation regarding the taxation of annuities, there is always the
possibility that the tax treatment of annuities could change by
legislation or other means (such as IRS regulations, revenue rulings, and
judicial decisions). Moreover, although unlikely, it is also possible
that any legislative change could be retroactive (that is, effective
prior to the date of such change).
o Transfers, Assignments or Exchanges of a Contract A transfer of ownership
of a Contract, the designation of an Annuitant, Payee or other
Beneficiary who is not also the Owner, the selection of certain Annuity
Payout Dates or the exchange of a Contract may result in certain tax
consequences to the Owner that are not discussed herein. An Owner
contemplating any such transfer, assignment, selection or exchange should
contact a qualified tax adviser with respect to the potential effects of
such a transaction.
Qualified Plans
The Contract may be used as a Qualified Plan that meets the requirements of an
individual retirement annuity ("IRA") under Section 408 of the Code. No
attempt is made herein to provide more than general information about the use
of the Contract as a Qualified Plan. Contractowners, Annuitants, and
Beneficiaries are cautioned that the rights of any person to any benefits
under such Qualified Plans may be limited by applicable law, regardless of the
terms and conditions of the Contract issued in connection therewith.
The amount that may be contributed to a Qualified Plan is subject to
limitations under the Code. In addition, early distributions from Qualified
Plans may be subject to penalty taxes. Furthermore, distributions from most
Qualified Plans are subject to certain minimum distribution rules. Failure to
comply with these rules could result in disqualification of the Plan or
subject the Owner or Annuitant to penalty taxes. As a result, the minimum
distribution rules may limit the availability of certain Annuity Options to
certain Annuitants and their beneficiaries. These rules and requirements may
not be incorporated into our Contract administration procedures. Therefore,
Contractowners, Annuitants, and Beneficiaries are responsible for determining
that contributions, distributions and other transactions with respect to the
Contracts comply with applicable law.
The following is a brief description of Qualified Plans and the use of the
Contract therewith:
o Section 408
Section 408 of the Code permits eligible individuals to establish
individual retirement programs through the purchase of Individual
Retirement Annuities ("IRAs"). The Contract may be purchased as an IRA.
IRAs are subject to limitations on the amount that may be contributed,
the persons who may be eligible and on the time when distributions must
commence. Depending upon the circumstances of the individual,
contributions to an IRA may be made on a deductible or nondeductible
basis. IRAs may not be transferred, sold, assigned, discounted or
pledged as collateral for a loan or other obligation. The annual premium
for an IRA may not be fixed and may not exceed $2,000. Any refund of
premium must be applied to the payment of future premiums or the purchase
of additional benefits.
Sale of the Contracts for use with IRAs may be subject to special
requirements imposed by the Internal Revenue Service. Purchasers of the
Contracts for such purposes will be provided with such supplementary
information as may be required by the Internal Revenue Service.
An individual's interest in an IRA must generally be distributed or begin
to be distributed not later than April 1 of the calendar year following
the calendar year in which the individual reaches age 70 1/2 ("required
beginning date"). Periodic distributions must not extend beyond the life
of the individual or the lives of the individual and a designated
beneficiary (or over a period extending beyond the life expectancy of the
individual or the joint life expectancy of the individual and a
designated beneficiary).
If an individual dies before reaching his or her required beginning date,
the individual's entire interest must generally be distributed within
five years of the individual's death. However, the five-year rule will
be deemed satisfied, if distributions begin before the close of the
calendar year following the individual's death to a designated
beneficiary and are made over the life of the beneficiary (or over a
period not extending beyond the life expectancy of the beneficiary). If
the designated beneficiary is the individual's surviving spouse,
distributions may be delayed until the individual would have reached age
70 1/2.
If an individual dies after reaching his or her required beginning date,
the individual's interest must generally be distributed at least as
rapidly as under the method of distribution in effect at the time of the
individual's death.
Distributions from IRAs are generally taxed under Code Section 72. Under
these rules, a portion of each distribution may be excludable from
income. The amount excludable from the individual's income is the amount
of the distribution which bears the same ratio as the individual's
nondeductible contributions bears to the expected return under the IRA.
The Internal Revenue Service has not reviewed the Contract for
qualification as an IRA, and has not addressed in a ruling of general
applicability whether a death benefit provision such as the provision in
the Contract comports with IRA qualification requirements.
o Tax Penalties
Premature Distribution Tax. Distributions from a Qualified Plan before
the owner reaches age 59 1/2 are generally subject to an additional tax
equal to 10 percent of the taxable portion of the distribution. The 10
percent penalty tax does not apply to distributions: (i) made on or
after the death of the Owner; (ii) attributable to the Owner's
disability; or (iii) which are part of a series of substantially equal
periodic payments made (at least annually) for the life (or life
expectancy) of the Owner or the joint lives (or joint life expectancies)
of the Owner and a designated beneficiary and which begin after the Owner
terminates employment.
Minimum Distribution Tax. If the amount distributed from a Qualified Plan
is less than the minimum required distribution for the year, the Owner is
subject to a 50 percent tax on the amount that was not properly
distributed.
Excess Distribution Tax. If the aggregate distributions from all IRAs and
certain other retirement plans with respect to an individual in a
calendar year exceed the greater of (i) $150,000, or (ii) $112,500, as
indexed for inflation ($148,500 for 1994), a penalty tax of 15 percent is
generally imposed (in addition to any ordinary income tax) on the excess
portion of the distribution.
o Withholding
Periodic distributions (e.g., annuities and installment payments) from a
Qualified Plan that will last for a period of 10 or more years are
generally subject to voluntary income tax withholding. The amount
withheld on such periodic distributions is determined at the rate
applicable to wages. The recipient of a periodic distribution may
generally elect not to have withholding apply.
Nonperiodic distributions (e.g., lump sums and annuities or installment
payments of less than 10 years) from an IRA are subject to income tax
withholding at a flat 10 percent rate. The recipient of such a
distribution may elect not to have withholding apply.
The above description of the federal income tax consequences applicable to
Qualified Plans which may be funded by the Contract offered by this Prospectus
is only a brief summary and is not intended as tax advice. The rules
governing the provisions of Qualified Plans are extremely complex and often
difficult to comprehend. Anything less than full compliance with the
applicable rules, all of which are subject to change, may have adverse tax
consequences. A prospective Contractowner considering adoption of a Qualified
Plan and purchase of a Contract in connection therewith should first consult a
qualified and competent tax adviser, with regard to the suitability of the
Contract as an investment vehicle for the Qualified Plan.
__________________________________________________________________________
OTHER INFORMATION
Voting of Fund Shares
The Company is the legal owner of the shares of the Funds held by the
Subaccounts of the Separate Account. The Company will exercise voting rights
attributable to the shares of each Portfolio of the Funds held in the
Subaccounts at any regular and special meetings of the shareholders of the
Funds on matters requiring shareholder voting under the 1940 Act. In
accordance with its view of presently applicable law, the Company will
exercise these voting rights based on instructions received from persons
having the voting interest in corresponding Subaccounts of the Separate
Account. However, if the 1940 Act or any regulations thereunder should be
amended, or if the present interpretation thereof should change, and as a
result the Company determines that it is permitted to vote the shares of the
Funds in its own right, it may elect to do so.
The person having the voting interest under a Contract is the Owner. Unless
otherwise required by applicable law, the number of shares of a particular
Portfolio as to which voting instructions may be given to the Company is
determined by dividing a Contractowner's Contract Value in a Subaccount on a
particular date by the net asset value per share of that Portfolio as of the
same date. Fractional votes will be counted. The number of votes as to which
voting instructions may be given will be determined as of the date coincident
with the date established by the Fund for determining shareholders eligible to
vote at the meeting of the Fund. If required by the SEC, the Company reserves
the right to determine in a different fashion the voting rights attributable
to the shares of the Funds. Voting instructions may be cast in person or by
proxy.
Voting rights attributable to the Contractowner's Contract Value in a
Subaccount for which no timely voting instructions are received will be voted
by the Company in the same proportion as the voting instructions that are
received in a timely manner for all Contracts participating in that
Subaccount. The Company will also exercise the voting rights from assets in
each Subaccount that are not otherwise attributable to Contractowners, if any,
in the same proportion as the voting instructions that are received in a
timely manner for all Contracts participating in that Subaccount.
Substitution of Investments
The Company reserves the right, subject to compliance with the law as then in
effect, to make additions to, deletions from, substitutions for, or
combinations of the securities that are held by the Separate Account or any
Subaccount or that the Separate Account or any Subaccount may purchase. If
shares of any or all of the Portfolios of the Funds should no longer be
available for investment, or if, in the judgment of the Company's management,
further investment in shares of any or all of the Portfolios of the Funds
should become inappropriate in view of the purposes of the Contract, the
Company may substitute shares of another Portfolio of the Funds or of a
different fund for shares already purchased, or to be purchased in the future
under the Contract. The Company may also purchase, through the Subaccount,
other securities for other classes of contracts, or permit a conversion
between classes of contracts on the basis of requests made by Owners.
In connection with a substitution of any shares attributable to an Owner's
interest in a Subaccount or the Separate Account, the Company will, to the
extent required under applicable law, provide notice, seek Owner approval,
seek prior approval of the SEC, and comply with the filing or other procedures
established by applicable state insurance regulators.
The Company also reserves the right to establish additional Subaccounts of the
Separate Account that would invest in a new Portfolio of one of the Funds or
in shares of another investment company, a series thereof, or other suitable
investment vehicle. New Subaccounts may be established in the sole discretion
of the Company, and any new Subaccount will be made available to existing
Owners on a basis to be determined by the Company. The Company may also
eliminate or combine one or more Subaccounts if, in its sole discretion,
marketing, tax, or investment conditions so warrant.
Subject to compliance with applicable law, the Company may transfer assets to
the General Account. The Company also reserves the right, subject to any
required regulatory approvals, to transfer assets of any Subaccount of the
Separate Account to another separate account or Subaccount.
In the event of any such substitution or change, the Company may, by
appropriate endorsement, make such changes in these and other contracts as may
be necessary or appropriate to reflect such substitution or change. If deemed
by the Company to be in the best interests of persons having voting rights
under the Contracts, the Separate Account may be operated as a management
investment company under the 1940 Act or any other form permitted by law; it
may be deregistered under that Act in the event such registration is no longer
required; or it may be combined with other separate accounts of the Company or
an affiliate thereof. Subject to compliance with applicable law, the Company
also may combine one or more Subaccounts and may establish a committee, board,
or other group to manage one or more aspects of the operation of the Separate
Account.
Changes to Comply with Law and Amendments
The Company reserves the right, without the consent of Owners, to suspend
sales of the Contract as presently offered and to make any change to the
provisions of the Contracts to comply with, or give Owners the benefit of, any
federal or state statute, rule, or regulation, including but not limited to
requirements for annuity contracts and retirement plans under the Internal
Revenue Code and regulations thereunder or any state statute or regulation.
The Company also reserves the right to limit the amount and frequency of
subsequent purchase payments.
Reports to Owners
A statement will be sent annually to each Contractowner setting forth a
summary of the transactions that occurred during the year, and indicating the
Contract Value as of the end of each year. In addition, the statement will
indicate the allocation of Contract Value among the Fixed Interest Account and
the Subaccounts and any other information required by law. Confirmations will
also be sent out upon purchase payments, exchanges, loans, loan repayments,
and full and partial withdrawals. Certain transactions will be confirmed
quarterly. These transactions include exchanges under the Dollar Cost
Averaging and Asset Rebalancing Options, purchase payments made under an
Automatic Investment Program, systematic withdrawals and annuity payments.
Each Contractowner will also receive an annual and semiannual report
containing financial statements for the Portfolios, which will include a list
of the portfolio securities of the Portfolios, as required by the 1940 Act,
and/or such other reports as may be required by federal securities laws.
Telephone Exchange Privileges
A Contractowner may request an exchange of Contract Value by telephone if an
Authorization for Telephone Requests form ("Telephone Authorization") has been
completed, signed, and filed at the T. Rowe Price Variable Annuity Service
Center. The Company has established procedures to confirm that instructions
communicated by telephone are genuine and will not be liable for any losses
due to fraudulent or unauthorized instructions, provided that it complies with
its procedures. The Company's procedures require that any person requesting
an exchange by telephone provide the account number and the Owner's tax
identification number and such instructions must be received on a recorded
line. The Company reserves the right to deny any telephone exchange request.
If all telephone lines are busy (which might occur, for example, during
periods of substantial market fluctuations), Contractowners might not be able
to request exchanges by telephone and would have to submit written requests.
By authorizing telephone exchanges, a Contractowner authorizes the Company to
accept and act upon telephonic instructions for exchanges involving the
Contractowner's Contract, and agrees that neither the Company, nor any of its
affiliates, nor the Funds, nor any of the directors, trustees, officers,
employees or agents, will be liable for any loss, damages, cost, or expense
(including attorney's fees) arising out of any requests effected in accordance
with the Telephone Authorization and believed by the Company to be genuine,
provided that the Company has complied with its procedures. As a result of
this policy on telephone requests, the Contractowner will bear the risk of
loss arising from the telephone exchange privileges. The Company may
discontinue, modify, or suspend telephone exchange privileges at any time.
Distribution of the Contract
T. Rowe Price Investment Services, Inc. ("Investment Services") is the
distributor of the Contracts. Investment Services also acts as the
distributor of certain other mutual funds advised by T. Rowe Price and
Price-Fleming. Investment Services is registered with the SEC as a
broker-dealer under the Securities Exchange Act of 1934, and in all 50 states,
the District of Columbia and Puerto Rico. Investment Services is a member of
the National Association of Securities Dealers, Inc. Investment Services is a
wholly-owned subsidiary of T. Rowe Price and is an affiliate of the Funds.
Legal Proceedings
There are no legal proceedings pending to which the Separate Account is a
party, or which would materially affect the Separate Account.
Legal Matters
Legal matters in connection with the issue and sale of the Contracts described
in this Prospectus, the Company's authority to issue the Contracts under
Kansas law, and the validity of the forms of the Contracts under Kansas law
have been passed upon by Amy J. Lee, Esq., the Company's Assistant Counsel.
Legal matters relating to the federal securities and federal income tax laws
have been passed upon by Dechert Price & Rhoads, Washington, D.C.
__________________________________________________________________________
PERFORMANCE INFORMATION
Performance information for the Subaccounts of the Separate Account, including
the yield and total return of all Subaccounts may appear in advertisements,
reports, and promotional literature to current or prospective Owners.
For all Subaccounts, quotations of yield will be based on all investment
income per Accumulation Unit earned during a given 30-day period, less
expenses accrued during the period ("net investment income"), and will be
computed by dividing net investment income by the value of an Accumulation
Unit on the last day of the period. Quotations of average annual total return
for any Subaccount will be expressed in terms of the average annual compounded
rate of return on a hypothetical investment in a Contract over a period of 1,
5, and 10 years (or, if less, up to the life of the Subaccount), and will
reflect the deduction of the mortality and expense risk charge and may
simultaneously be shown for other periods. Where the portfolio in which a
Subaccount invests was established prior to inception of the Subaccount,
quotations of total return may include quotations for periods beginning prior
to the Subaccount's date of inception. Such quotations of total return are
based upon the performance of the Subaccount's corresponding Portfolio
adjusted to reflect deduction of the mortality and expense risk charge.
Performance information for any Subaccount reflects only the performance of a
hypothetical Contract under which Contract Value is allocated to a Subaccount
during a particular time period on which the calculations are based.
Performance information should be considered in light of the investment
objectives and policies, characteristics, and quality of the Portfolios in
which the Subaccount invests, and the market conditions during the given time
period, and should not be considered as a representation of what may be
achieved in the future. For a description of the methods used to determine
yield and total return for the Subaccounts and the usage of other performance
related information, see the Statement of Additional Information.
__________________________________________________________________________
ADDITIONAL INFORMATION
Registration Statement
A Registration Statement under the 1933 Act has been filed with the SEC
relating to the offering described in this Prospectus. This Prospectus has
been filed as a part of the Registration Statement and does not contain all of
the information set forth in the Registration Statement and exhibits thereto,
and reference is made to such Registration Statement and exhibits for further
information relating to the Company and the Contract. Statements contained in
this Prospectus, as to the content of the Contract and other legal
instruments, are summaries. For a complete statement of the terms thereof,
reference is made to the instruments filed as exhibits to the Registration
Statement. The Registration Statement and the exhibits thereto may be
inspected and copied at the SEC's office, located at 450 Fifth Street, N.W.,
Washington, D.C.
Financial Statements
Financial statements of the Company at December 31, 1994, and 1993, and for
each of the three years in the period ended December 31, 1994, are contained
in the Statement of Additional Information. Financial Statements of the
Separate Account are not yet available.
STATEMENT OF ADDITIONAL INFORMATION
The Statement of Additional Information contains more specific information and
financial statements relating to the Company. The Table of Contents of the
Statement of Additional Information is set forth below:
TABLE OF CONTENTS
General Information and History. . . . . . . . . . . 1
Distribution of the Contract . . . . . . . . . . . . 1
Limits on Premiums Paid Under Tax-Qualified
Retirement Plans . . . . . . . . . . . . . . . . . . 1
Independent Auditors . . . . . . . . . . . . . . . . 2
Performance Information. . . . . . . . . . . . . . . 2
Financial Statements . . . . . . . . . . . . . . . . 3
________________________________________________________________________
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
Combined Statement of Additional Information for the T. Rowe
Price No-Load Variable Annuity, dated May 1, 1995, should be
inserted here.
Statement of Additional Information
for the Funds
The T. Rowe Price No-Load Variable Annuity
May 1, 1995
Variable Annuity Service Center
P.O. Box 750440
Topeka, Kansas 66675-0440
CA TRP609 (5/95)
STATEMENT OF ADDITIONAL INFORMATION
T. ROWE PRICE FIXED INCOME SERIES, INC.
T. Rowe Price Limited-Term Bond Portfolio
T. ROWE PRICE EQUITY SERIES, INC.
T. Rowe Price Personal Strategy Balanced Portfolio
T. Rowe Price Equity Income Portfolio
T. Rowe Price New America Growth Portfolio
T. ROWE PRICE INTERNATIONAL SERIES, INC.
T. Rowe Price International Stock Portfolio
(the "Funds")
Shares of the Funds may be offered to insurance company separate accounts
(including the T. Rowe Price Variable Annuity Account, a separate account of
Security Benefit Life Insurance Company ("Security Benefit")) established for
the purpose of funding variable annuity contracts. They may also be offered to
insurance company separate accounts established for the purpose of funding
variable life contracts. Variable annuity and variable life Contract Holders
or Participants (including individuals purchasing the T. Rowe Price No-Load
Variable Annuity) are not the shareholders of the Funds. Rather, the separate
account is the shareholder. The T. Rowe Price No-Load Variable Annuity
contract is issued by Security Benefit and described in the attached
prospectus. The Funds assume no responsibility for any insurance company
prospectuses or variable annuity or life contracts.
In the future, it is possible that the Funds may offer their shares to
separate accounts funding variable annuities, variable life insurance or other
insurance products of other insurance companies.
This Statement of Additional Information is not a prospectus but should be
read in conjunction with the Funds' prospectuses dated May 1, 1995, which may
be obtained by contacting T. Rowe Price Variable Annuity Service Center, P.O.
Box 750440, Topeka, Kansas, 66675-0440, 1-800-469-6587.
The date of this Statement of Additional Information is May 1, 1995.
__________________________________________________________________________
CONTENTS
17 Asset-Backed Securities
75 Capital Stock
64 Code of Ethics
63 Custodian
63 Distributor for Fund
74 Dividends and Distributions
76 Federal and State Registration of Shares
40 Foreign Currency Transactions
40 Foreign Futures and Options
34 Futures Contracts
21 Hybrid Instruments
76 Independent Accountants
24 Illiquid or Restricted Securities
61 Investment Management Services
3 Investment Objectives and Policies
48 Investment Performance
10 Investment Program
43 Investment Restrictions
76 Legal Counsel
25 Lending of Portfolio Securities
54 Management of Fund
11 Mortgage-Related Securities
73 Net Asset Value Per Share
27 Options
25 Portfolio Management Practices
64 Portfolio Transactions
73 Pricing of Securities
60 Principal Holders of Securities
78 Ratings of Commercial Paper
79 Ratings of Corporate Debt Securities
26 Repurchase Agreements
4 Risk Factors
74 Tax Status
25 Warrants
23 When-Issued Securities and Forward Commitment Contracts
47 Yield Information
Throughout this Statement of Additional Information, "the Fund" is intended to
refer to each Fund listed on the cover page, unless otherwise indicated.
References to "the Manager" are intended to refer to T. Rowe Price when
mentioned in connection with the Limited-Term Bond, Personal Strategy
Balanced, Equity Income, and New America Growth Portfolios. References to
"the Manager" refer to Rowe-Price Fleming International, Inc.
("Price-Fleming") when mentioning the International Stock Portfolio. These
references are intended throughout this Statement of Additional Information
unless otherwise indicated.
__________________________________________________________________________
INVESTMENT OBJECTIVES AND POLICIES
The following information supplements the discussion of each Fund's investment
objective and policies discussed in the prospectus. Each Fund will not make a
material change in its investment objective without obtaining shareholder
approval. Unless otherwise specified, the investment program and restrictions
of the Funds are not fundamental policies. Each Fund's operating policies are
subject to change by the 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.
International Stock Portfolio
It is the present intention of Price-Fleming to invest in companies based in
(or governments of or within) the Far East (for example, Japan, Hong Kong,
Singapore, and Malaysia), Western Europe (for example, United Kingdom,
Germany, Hungary, Poland, Netherlands, France, Spain, and Switzerland), South
Africa, Australia, Canada, and such other areas and countries as Price-Fleming
may determine from time to time.
In determining the appropriate distribution of investments among various
countries and geographic regions, Price-Fleming ordinarily considers the
following factors: prospects for relative economic growth between foreign
countries; expected levels of inflation; government policies influencing
business conditions; the outlook for currency relationships; and the range of
individual investment opportunities available to international investors.
In analyzing companies for investment, Price-Fleming ordinarily looks for one
or more of the following characteristics: an above-average earnings growth
per share; high return on invested capital; healthy balance sheet; sound
financial and accounting policies and overall financial strength; strong
competitive advantages; effective research and product development and
marketing; efficient service; pricing flexibility; strength of management; and
general operating characteristics which will enable the companies to compete
successfully in their market place. While current dividend income is not a
prerequisite in the selection of portfolio companies, the companies in which
the Fund invests normally will have a record of paying dividends, and will
generally be expected to increase the amounts of such dividends in future
years as earnings increase.
It is expected that the International Stock Portfolio's investments will
ordinarily be traded on exchanges located at least in the respective countries
in which the various issuers of such securities are principally based.
__________________________________________________________________________
RISK FACTORS
General
Each Fund's share price will fluctuate with market, economic and where
applicable, foreign exchange conditions, and your investment may be worth more
or less when redeemed than when purchased. No Fund should be relied upon as a
complete investment program, nor used to play short-term swings in the stock,
bond, or foreign exchange markets. Because of each Fund's investment policy,
the Fund may or may not be suitable or appropriate for all investors. None of
the Funds are money market funds and none are an appropriate investment for
those whose primary objective is principal stability. There is risk in all
investments. The value of the portfolio securities of the Funds will
fluctuate based upon market conditions. Although the Funds seek to reduce
risk by investing in a diversified portfolio, such diversification does not
eliminate all risk. There can, of course, be no assurance that any Fund will
achieve its investment objective. 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 the Funds.
Debt Obligations (All Funds except New America Growth and International Stock)
Yields on short, intermediate, and long-term securities are dependent on a
variety of factors, including the general conditions of the money and bond
markets, the size of a particular offering, the maturity of the obligation,
and the credit quality and rating of the issue. Debt securities with longer
maturities tend to have 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 debt securities usually
vary, depending upon available yields. An increase in interest rates will
generally reduce the value of portfolio debt securities, and a decline in
interest rates will generally increase the value of portfolio debt securities.
The ability of the Fund to achieve its investment objective is also dependent
on the continuing ability of the issuers of the debt securities in which the
Fund invests to meet their obligations for the payment of interest and
principal when due. Although the Fund seeks to reduce risk by portfolio
diversification, credit analysis (considered by the Manager to be among the
strongest in the investment management industry), and attention to trends in
the economy, industries and financial markets, such efforts will not eliminate
all risk. There can, of course, be no assurance that any Fund will achieve
its investment objective.
After purchase by the Fund, a security may cease to be rated or its rating may
be reduced below the minimum required for purchase by the Fund. Neither event
will require a sale of such security by the Fund. However, the Manager will
consider such events in its determination of whether the Fund should continue
to hold the security. To the extent that the ratings given by Moody's or S&P
may change as a result of changes in such organizations or their rating
systems, the Fund will attempt to use comparable ratings as standards for
investments in accordance with the investment policies contained in the
prospectus. When purchasing unrated securities, the Manager, under the
supervision of each Fund's Board of Directors, determines whether the unrated
security is of a quality comparable to that which the Fund is allowed to
purchase.
Limited-Term Bond and Personal Strategy Balanced Portfolios
Mortgage securities differ from conventional bonds in that principal is paid
back over the life of the security rather than at maturity. As a result, the
holder of a mortgage security (i.e., the Fund) receives monthly scheduled
payments of principal and interest, and may receive unscheduled principal
payments representing prepayments on the underlying mortgages. The incidence
of unscheduled principal prepayments is also likely to increase in mortgage
pools owned by the Fund when prevailing mortgage loan rates fall below the
mortgage rates of the securities underlying the individual pool. The effect
of such prepayments in a falling rate environment is to (1) cause the Fund to
reinvest principal payments at the then lower prevailing interest rate, and
(2) reduce the potential for capital appreciation beyond the face amount of
the security. Conversely, the Fund may realize a gain on prepayments of
mortgage pools trading at a discount. Such prepayments will provide an early
return of principal which may then be reinvested at the then higher prevailing
interest rate.
The market value of adjustable rate mortgage securities ("ARMs"), like other
U.S. government securities, will generally vary inversely with changes in
market interest rates, declining when interest rates rise and rising when
interest rates decline. Because of their periodic adjustment feature, ARMs
should be more sensitive to short-term interest rates than long-term rates.
They should also display less volatility than long-term mortgage securities.
Thus, while having less risk of a decline during periods of rapidly rising
rates, ARMs may also have less potential for capital appreciation than other
investments of comparable maturities. Interest rate caps on mortgages
underlying ARM securities may prevent income on the ARM from increasing to
prevailing interest rate levels and cause the securities to decline in value.
In addition, to the extent ARMs are purchased at a premium, mortgage
foreclosures and unscheduled principal prepayments may result in some loss of
the holders' principal investment to the extent of the premium paid. On the
other hand, if ARMs are purchased at a discount, both a scheduled payment of
principal and an unscheduled prepayment of principal will increase current and
total returns and will accelerate the recognition of income which when
distributed to shareholders will be taxable as ordinary income.
Risk Factors of Foreign Investing (All Funds)
There are special risks in foreign investing. Certain of these risks are
inherent in any mutual fund investing in foreign securities while others
relate more to the countries in which each Fund will invest. Many of the
risks are more pronounced for investments in developing or emerging countries,
such as many of the countries of Southeast Asia, Latin America, Eastern Europe
and the Middle East. Although there is no universally accepted definition, a
developing country is generally considered to be a country which is in the
initial stages of its industrialization cycle with a per capita gross national
product of less than $8,000.
Political and Economic Factors. Individual foreign economies of certain
countries may differ favorably or unfavorably from the United States' economy
in such respects as growth of gross national product, rate of inflation,
capital reinvestment, resource self-sufficiency and balance of payments
position. The internal politics of certain foreign countries are not as
stable as in the United States. For example, in 1991, the existing government
in Thailand was overthrown in a military coup. In 1992, there were two
military coup attempts in Venezuela and in 1992 the President of Brazil was
impeached. In addition, significant external political risks currently affect
some foreign countries. Both Taiwan and China still claim sovereignty of one
another and there is a demilitarized border between North and South Korea.
Governments in certain foreign countries continue to participate to a
significant degree, through ownership interest or regulation, in their
respective economies. Action by these governments could have a significant
effect on market prices of securities and payment of dividends. The economies
of many foreign countries are heavily dependent upon international trade and
are accordingly affected by protective trade barriers and economic conditions
of their trading partners. The enactment by these trading partners of
protectionist trade legislation could have a significant adverse effect upon
the securities markets of such countries.
Currency Fluctuations. The Funds will invest in securities denominated in
various currencies. Accordingly, a change in the value of any such currency
against the U.S. dollar will result in a corresponding change in the U.S.
dollar value of the Funds' assets denominated in that currency. Such changes
will also affect the Funds' income. Generally, when a given currency
appreciates against the dollar (the dollar weakens) the value of the Fund's
securities denominated in that currency will rise. When a given currency
depreciates against the dollar (the dollar strengthens) the value of the
Funds' securities denominated in that currency would be expected to decline.
Investment and Repatriation of Restrictions. Foreign investment in the
securities markets of certain foreign countries is restricted or controlled in
varying degrees. These restrictions may limit at times and preclude
investment in certain of such countries and may increase the cost and expenses
of the Funds. Investments by foreign investors are subject to a variety of
restrictions in many developing countries. These restrictions may take the
form of prior governmental approval, limits on the amount or type of
securities held by foreigners, and limits on the types of companies in which
foreigners may invest. Additional or different restrictions may be imposed at
any time by these or other countries in which the Funds invest. In addition,
the repatriation of both investment income and capital from several foreign
countries is restricted and controlled under certain regulations, including in
some cases the need for certain government consents. For example, capital
invested in Chile normally cannot be repatriated for one year.
Market Characteristics. Foreign stock and bond markets are generally not as
developed or efficient as, and may be more volatile than, those in the United
States. While growing in volume, they usually have substantially less volume
than U.S. markets and the Funds' portfolio securities may be less liquid and
subject to more rapid and erratic price movements than securities of
comparable U.S. companies. Equity securities may trade at price/earnings
multiples higher than comparable United States securities and such levels may
not be sustainable. Fixed commissions on foreign stock exchanges are
generally higher than negotiated commissions on United States exchanges,
although the Funds will endeavor to achieve the most favorable net results on
their portfolio transactions. There is generally less government supervision
and regulation of foreign stock exchanges, brokers and listed companies than
in the United States. Moreover, settlement practices for transactions in
foreign markets may differ from those in United States markets. Such
differences may include delays beyond periods customary in the United States
and practices, such as delivery of securities prior to receipt of payment,
which increase the likelihood of a "failed settlement." Failed settlements
can result in losses to the Fund.
Investment Funds. Each Fund may invest in investment funds which have been
authorized by the governments of certain countries specifically to permit
foreign investment in securities of companies listed and traded on the stock
exchanges in these respective countries. The Fund's investment in these funds
is subject to the provisions of the 1940 Act. If the Funds invest in such
investment funds, the Fund's shareholders will bear not only their
proportionate share of the expenses of the Fund (including operating expenses
and the fees of the investment manager), but also will bear indirectly similar
expenses of the underlying investment funds. In addition, the securities of
these investment funds may trade at a premium over their net asset value.
Information and Supervision. There is generally less publicly available
information about foreign companies comparable to reports and ratings that are
published about companies in the United States. Foreign companies are also
generally not subject to uniform accounting, auditing and financial reporting
standards, practices and requirements comparable to those applicable to United
States companies. It also may be more difficult to keep currently informed of
corporate actions which affect the prices of portfolio securities.
Taxes. The dividends and interest payable on certain of the Funds' foreign
portfolio securities may be subject to foreign withholding taxes, thus
reducing the net amount of income available for distribution to the Funds'
shareholders.
Other. With respect to certain foreign countries, especially developing and
emerging ones, there is the possibility of adverse changes in investment or
exchange control regulations, expropriation or confiscatory taxation,
limitations on the removal of funds or other assets of the Funds, political or
social instability, or diplomatic developments which could affect investments
by U.S. persons in those countries.
Eastern Europe and Russia. Changes occurring in Eastern Europe and Russia
today could have long-term potential consequences. As restrictions fall, this
could result in rising standards of living, lower manufacturing costs, growing
consumer spending, and substantial economic growth. However, investment in
the countries of Eastern Europe and Russia is highly speculative at this time.
Political and economic reforms are too recent to establish a definite trend
away from centrally-planned economies and state owned industries. In many of
the countries of Eastern Europe and Russia, there is no stock exchange or
formal market for securities. Such countries may also have government
exchange controls, currencies with no recognizable market value relative to
the established currencies of western market economies, little or no
experience in trading in securities, no financial reporting standards, a lack
of a banking and securities infrastructure to handle such trading, and a legal
tradition which does not recognize rights in private property. In addition,
these countries may have national policies which restrict investments in
companies deemed sensitive to the country's national interest. Further, the
governments in such countries may require governmental or quasi-governmental
authorities to act as custodian of the Fund's assets invested in such
countries and these authorities may not qualify as a foreign custodian under
the Investment Company Act of 1940 and exemptive relief from such Act may be
required. All of these considerations are among the factors which could cause
significant risks and uncertainties to investment in Eastern Europe and
Russia. Each Fund will only invest in a company located in, or a government
of, Eastern Europe and Russia, if it believes the potential return justifies
the risk. To the extent any securities issued by companies in Eastern Europe
and Russia are considered illiquid, each Fund will be required to include such
securities within its 15% restriction on investing in illiquid securities.
Latin America
To the extent the Fund invests in Latin America, such investments will be
subject to the factors discussed below.
Inflation. Most Latin American countries have experienced, at one time or
another, severe and persistent levels of inflation, including, in some cases,
hyperinflation. This has, in turn, led to high interest rates, extreme
measures by governments to keep inflation in check and a generally
debilitating effect on economic growth. Although inflation in many countries
has lessened, there is no guarantee it will remain at lower levels.
Political Instability. The political history of certain Latin American
countries has been characterized by political uncertainty, intervention by the
military in civilian and economic spheres, and political corruption. Such
developments, if they were to reoccur, could reverse favorable trends toward
market and economic reform, privatization and removal of trade barriers and
result in significant disruption in securities markets.
Foreign Currency. Certain Latin American countries may have managed currencies
which are maintained at artificial levels to the U.S. dollar rather than at
levels determined by the market. This type of system can lead to sudden and
large adjustments in the currency which, in turn, can have a disruptive and
negative effect on foreign investors. For example, in late 1994 the value of
the Mexican peso lost more than one-third of its value relative to the dollar.
Certain Latin American countries also may restrict the free conversion of
their currency into foreign currencies, including the U.S. dollar. There is
no significant foreign exchange market for certain currencies and it would, as
a result, be difficult for the Fund to engage in foreign currency transactions
designed to protect the value of the Fund's interests in securities
denominated in such currencies.
Sovereign Debt. A number of Latin American countries are among the largest
debtors of developing countries. There have been moratoria on, and
reschedulings of, repayment with respect to these debts. Such events can
restrict the flexibility of these debtor nations in the international markets
and result in the imposition of onerous conditions on their economies.
Special Risks of Investing in Junk Bonds (Limited-Term Bond, Personal Strategy
Balanced and Equity Income Funds)
The following special considerations are additional risk factors associated
with the Fund's investments in lower rated debt securities.
Youth and Growth of the Lower Rated Debt Securities Market. The market for
lower rated debt securities is relatively new and its growth has paralleled a
long economic expansion. Past experience may not, therefore, provide an
accurate indication of future performance of this market, particularly during
periods of economic recession. An economic downturn or increase in interest
rates is likely to have a greater negative effect on this market, the value of
lower rated debt securities in the Fund's portfolio, the Fund's net asset
value and the ability of the bonds' issuers to repay principal and interest,
meet projected business goals and obtain additional financing than on higher
rated securities. These circumstances also may result in a higher incidence
of defaults than with respect to higher rated securities. An investment in
this Fund is more speculative than investment in shares of a fund which
invests only in higher rated debt securities.
Sensitivity to Interest Rate and Economic Changes. Prices of lower rated debt
securities may be more sensitive to adverse economic changes or corporate
developments than higher rated investments. Debt securities with longer
maturities, which may have higher yields, may increase or decrease in value
more than debt securities with shorter maturities. Market prices of lower
rated debt securities structured as zero coupon or pay-in-kind securities are
affected to a greater extent by interest rate changes and may be more volatile
than securities which pay interest periodically and in cash. Where it deems
it appropriate and in the best interests of Fund shareholders, the Fund may
incur additional expenses to seek recovery on a debt security on which the
issuer has defaulted and to pursue litigation to protect the interests of
security holders of its portfolio companies.
Liquidity and Valuation. Because the market for lower rated securities may be
thinner and less active than for higher rated securities, there may be market
price volatility for these securities and limited liquidity in the resale
market. Nonrated securities are usually not as attractive to as many buyers
as rated securities are, a factor which may make nonrated securities less
marketable. These factors may have the effect of limiting the availability of
the securities for purchase by the Fund and may also limit the ability of the
Fund to sell such securities at their fair value either to meet redemption
requests or in response to changes in the economy or the financial markets.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the values and liquidity of lower rated
debt securities, especially in a thinly traded market. To the extent the Fund
owns or may acquire illiquid or restricted lower rated securities, these
securities may involve special registration responsibilities, liabilities and
costs, and liquidity and valuation difficulties. Changes in values of debt
securities which the Fund owns will affect its net asset value per share. If
market quotations are not readily available for the Fund's lower rated or
nonrated securities, these securities will be valued by a method that the
Fund's Board of Directors believes accurately reflects fair value. Judgment
plays a greater role in valuing lower rated debt securities than with respect
to securities for which more external sources of quotations and last sale
information are available.
Congressional Action. New and proposed laws may have an impact on the market
for lower rated debt securities. For example, as a result of the Financial
Institution's Reform, Recovery, and Enforcement Act of 1989, savings and loan
associations were required to dispose of their high yield bonds no later than
July 1, 1994. Qualified affiliates of savings and loan associations, however,
may purchase and retain these securities, and savings and loan associations
may divest these securities by sale to their qualified affiliates. The
Manager is unable at this time to predict what effect, if any, the legislation
may have on the market for lower rated debt securities.
Taxation. Special tax considerations are associated with investing in lower
rated debt securities structured as zero coupon or pay-in-kind securities.
The Fund accrues income on these securities prior to the receipt of cash
payments. The Fund must distribute substantially all of its income to its
shareholders to qualify for pass-through treatment under the tax laws and may,
therefore, have to dispose of its portfolio securities to satisfy distribution
requirements.
___________________________________________________________________________
INVESTMENT PROGRAM
TYPES OF SECURITIES
Set forth below is additional information about certain of the investments
described in each Fund's prospectus.
Debt Securities (Limited-Term Bond and Personal Strategy Balanced Funds)
Fixed income securities in which the Fund may invest include, but are not
limited to, those described below.
o U.S. Government Obligations. Bills, notes, bonds and other debt
securities issued by the U.S. Treasury. These are direct obligations of
the U.S. Government and differ mainly in the length of their maturities.
o U.S. Government Agency Securities. Issued or guaranteed by U.S.
Government sponsored enterprises and federal agencies. These include
securities issued by the Federal National Mortgage Association,
Government National Mortgage Association, Federal Home Loan Bank,
Federal Land Banks, Farmers Home Administration, Banks for Cooperatives,
Federal Intermediate Credit Banks, Federal Financing Bank, Farm Credit
Banks, the Small Business Association, and the Tennessee Valley
Authority. Some of these securities are supported by the full faith and
credit of the U.S. Treasury; and the remainder are supported only by the
credit of the instrumentality, which may or may not include the right of
the issuer to borrow from the Treasury.
o Bank Obligations. Certificates of deposit, bankers' acceptances, and
other short-term debt obligations. Certificates of deposit are
short-term obligations of commercial banks. A bankers' acceptance is a
time draft drawn on a commercial bank by a borrower, usually in
connection with international commercial transactions. Certificates of
deposit may have fixed or variable rates. The Fund may invest in U.S.
banks, foreign branches of U.S. banks, U.S. branches of foreign banks,
and foreign branches of foreign banks.
o Corporate Debt Securities. Outstanding nonconvertible corporate debt
securities (e.g., bonds and debentures). Corporate notes may have
fixed, variable, or floating rates.
o Commercial Paper. Short-term promissory notes issued by corporations
primarily to finance short-term credit needs. Certain notes may have
floating or variable rates.
o Foreign Government Securities. Issued or guaranteed by a foreign
government, province, instrumentality, political subdivision or similar
unit thereof.
o Savings and Loan Obligations. Negotiable certificates of deposit and
other short-term debt obligations of savings and loan associations.
o Supranational Agencies. Securities of certain supranational entities,
such as the International Development Bank.
Mortgage-Related Securities (Limited-Term Bond and Personal Strategy Balanced
Funds)
Mortgage-related securities in which each Fund may invest include, but are not
limited to, those described below.
o Mortgage-Backed Securities. Mortgage-backed securities are securities
representing an interest in a pool of mortgages. The mortgages may be
of a variety of types, including adjustable rate, conventional 30-year
fixed rate, graduated payment, and 15-year. Principal and interest
payments made on the mortgages in the underlying mortgage pool are
passed through to the Fund. This is in contrast to traditional bonds
where principal is normally paid back at maturity in a lump sum.
Unscheduled prepayments of principal shorten the securities' weighted
average life and may lower their total return. (When a mortgage in the
underlying mortgage pool is prepaid, an unscheduled principal prepayment
is passed through to the Fund. This principal is returned to the Fund
at par. As a result, if a mortgage security were trading at a premium,
its total return would be lowered by prepayments, and if a mortgage
security were trading at a discount, its total return would be increased
by prepayments.) The value of these securities also may change because
of changes in the market's perception of the creditworthiness of the
federal agency that issued them. In addition, the mortgage securities
market in general may be adversely affected by changes in governmental
regulation or tax policies.
o U.S. Government Agency Mortgage-Backed Securities. These are obligations
issued or guaranteed by the United States Government or one of its
agencies or instrumentalities, such as the Government National Mortgage
Association ("Ginnie Mae" or "GNMA"), the Federal National Mortgage
Association ("Fannie Mae" or "FNMA") and the Federal Home Loan Mortgage
Corporation ("Freddie Mac" or "FHLMC"). FNMA and FHLMC obligations are
not backed by the full faith and credit of the U.S. Government as GNMA
certificates are, but FNMA and FHLMC securities are supported by the
instrumentality's right to borrow from the United States Treasury. U.S.
Government Agency Mortgage-Backed Certificates provide for the
pass-through to investors of their pro-rata share of monthly payments
(including any prepayments) made by the individual borrowers on the
pooled mortgage loans, net of any fees paid to the guarantor of such
securities and the servicer of the underlying mortgage loans. Each of
GNMA, FNMA and FHLMC guarantees timely distributions of interest to
certificate holders. GNMA and FNMA guarantee timely distributions of
scheduled principal. FHLMC has in the past guaranteed only the ultimate
collection of principal of the underlying mortgage loan; however, FHLMC
now issues Mortgage-Backed Securities (FHLMC Gold PCs) which also
guarantee timely payment of monthly principal reductions.
o Ginnie Mae Certificates. Ginnie Mae is a wholly-owned corporate
instrumentality of the United States within the Department of Housing
and Urban Development. The National Housing Act of 1934, as amended
(the "Housing Act"), authorizes Ginnie Mae to guarantee the timely
payment of the principal of and interest on certificates that are based
on and backed by a pool of mortgage loans insured by the Federal Housing
Administration under the Housing Act, or Title V of the Housing Act of
1949 ("FHA Loans"), or guaranteed by the Department of Veterans Affairs
under the Servicemen's Readjustment Act of 1944, as amended ("VA
Loans"), or by pools of other eligible mortgage loans. The Housing Act
provides that the full faith and credit of the United States government
is pledged to the payment of all amounts that may be required to be paid
under any guaranty. In order to meet its obligations under such
guaranty, Ginnie Mae is authorized to borrow from the United States
Treasury with no limitations as to amount.
o Fannie Mae Certificates. Fannie Mae is a federally chartered and
privately owned corporation organized and existing under the Federal
National Mortgage Association Charter Act of 1938. FNMA Certificates
represent a pro-rata interest in a group of mortgage loans purchased by
Fannie Mae. FNMA guarantees the timely payment of principal and
interest on the securities it issues. The obligations of FNMA are not
backed by the full faith and credit of the U.S. Government.
o Freddie Mac Certificates. Freddie Mac is a corporate instrumentality of
the United States created pursuant to the Emergency Home Finance Act of
1970, as amended (the "FHLMC Act"). Freddie Mac Certificates represent
a pro-rata interest in a group of mortgage loans (a "Freddie Mac
Certificate group") purchased by Freddie Mac. Freddie Mac guarantees
timely payment of interest and principal on certain securities it issues
and timely payment of interest and eventual payment of principal on
other securities it issues. The obligations of Freddie Mac are
obligations solely of Freddie Mac and are not backed by the full faith
and credit of the U.S. Government.
When mortgages in the pool underlying a Mortgage-Backed Security are
prepaid by mortgagors or by result of foreclosure, such principal
payments are passed through to the certificate holders. Accordingly,
the life of the Mortgage-Backed Security is likely to be substantially
shorter than the stated maturity of the mortgages in the underlying
pool. Because of such variation in prepayment rates, it is not possible
to predict the life of a particular Mortgage-Backed Security, but FHA
statistics indicate that 25- to 30-year single family dwelling mortgages
have an average life of approximately 12 years. The majority of Ginnie
Mae Certificates are backed by mortgages of this type, and, accordingly,
the generally accepted practice treats Ginnie Mae Certificates as
30-year securities which prepay full in the 12th year. FNMA and Freddie
Mac Certificates may have differing prepayment characteristics.
Fixed Rate Mortgage-Backed Securities bear a stated "coupon rate" which
represents the effective mortgage rate at the time of issuance, less
certain fees to GNMA, FNMA and FHLMC for providing the guarantee, and
the issuer for assembling the pool and for passing through monthly
payments of interest and principal.
Payments to holders of Mortgage-Backed Securities consist of the monthly
distributions of interest and principal less the applicable fees. The
actual yield to be earned by a holder of Mortgage-Backed Securities is
calculated by dividing interest payments by the purchase price paid for
the Mortgage-Backed Securities (which may be at a premium or a discount
from the face value of the certificate).
Monthly distributions of interest, as contrasted to semi-annual
distributions which are common for other fixed interest investments,
have the effect of compounding and thereby raising the effective annual
yield earned on Mortgage-Backed Securities. Because of the variation in
the life of the pools of mortgages which back various Mortgage-Backed
Securities, and because it is impossible to anticipate the rate of
interest at which future principal payments may be reinvested, the
actual yield earned from a portfolio of Mortgage-Backed Securities will
differ significantly from the yield estimated by using an assumption of
a certain life for each Mortgage-Backed Security included in such a
portfolio as described above.
o U.S. Government Agency Multi-Class Pass-Through Securities. Unlike CMOs,
U.S. Government Agency Multi-Class Pass-Through Securities, which
include FNMA Guaranteed REMIC Pass-Through Certificates and FHLMC
Multi-Class Mortgage Participation Certificates, are ownership interests
in a pool of Mortgage Assets. Unless the context indicates otherwise,
all references herein to CMOs include multi-class pass-through
securities.
o Multi-Class Residential Mortgage Securities. Such securities represent
interests in pools of mortgage loans to residential home buyers made by
commercial banks, savings and loan associations or other financial
institutions. Unlike GNMA, FNMA and FHLMC securities, the payment of
principal and interest on Multi-Class Residential Mortgage Securities is
not guaranteed by the U.S. Government or any of its agencies.
Accordingly, yields on Multi-Class Residential Mortgage Securities have
been historically higher than the yields on U.S. government mortgage
securities. However, the risk of loss due to default on such
instruments is higher since they are not guaranteed by the U.S.
Government or its agencies. Additionally, pools of such securities may
be divided into senior or subordinated segments. Although subordinated
mortgage securities may have a higher yield than senior mortgage
securities, the risk of loss of principal is greater because losses on
the underlying mortgage loans must be borne by persons holding
subordinated securities before those holding senior mortgage securities.
o Privately-Issued Mortgage-Backed Certificates. These are pass-through
certificates issued by non-governmental issuers. Pools of conventional
residential mortgage loans created by such issuers generally offer a
higher rate of interest than government and government-related pools
because there are no direct or indirect government guarantees of
payment. Timely payment of interest and principal of these pools is,
however, generally supported by various forms of insurance or
guarantees, including individual loan, title, pool and hazard insurance.
The insurance and guarantees are issued by government entities, private
insurance or the mortgage poolers. Such insurance and guarantees and
the creditworthiness of the issuers thereof will be considered in
determining whether a mortgage-related security meets the Fund's quality
standards. The Fund may buy mortgage-related securities without
insurance or guarantees if through an examination of the loan experience
and practices of the poolers, the investment manager determines that the
securities meet the Fund's quality standards.
o Collateralized Mortgage Obligations (CMOs). CMOs are bonds that are
collateralized by whole loan mortgages or mortgage pass-through
securities. The bonds issued in a CMO deal are divided into groups, and
each group of bonds is referred to as a "tranche." Under the
traditional CMO structure, the cash flows generated by the mortgages or
mortgage pass-through securities in the collateral pool are used to
first pay interest and then pay principal to the CMO bondholders. The
bonds issued under a CMO structure are retired sequentially as opposed
to the pro rata return of principal found in traditional pass-through
obligations. Subject to the various provisions of individual CMO
issues, the cash flow generated by the underlying collateral (to the
extent it exceeds the amount required to pay the stated interest) is
used to retire the bonds. Under the CMO structure, the repayment of
principal among the different tranches is prioritized in accordance with
the terms of the particular CMO issuance. The "fastest-pay" tranche of
bonds, as specified in the prospectus for the issuance, would initially
receive all principal payments. When that tranche of bonds is retired,
the next tranche, or tranches, in the sequence, as specified in the
prospectus, receive all of the principal payments until they are
retired. The sequential retirement of bond groups continues until the
last tranche, or group of bonds, is retired. Accordingly, the CMO
structure allows the issuer to use cash flows of long maturity,
monthly-pay collateral to formulate securities with short, intermediate
and long final maturities and expected average lives.
In recent years, new types of CMO structures have evolved. These
include floating rate CMOs, planned amortization classes, accrual bonds
and CMO residuals. These newer structures affect the amount and timing
of principal and interest received by each tranche from the underlying
collateral. Under certain of these new structures, given classes of
CMOs have priority over others with respect to the receipt of
prepayments on the mortgages. Therefore, depending on the type of CMOs
in which the Fund invests, the investment may be subject to a greater or
lesser risk of prepayment than other types of mortgage-related
securities.
The primary risk of any mortgage security is the uncertainty of the
timing of cash flows. For CMOs, the primary risk results from the rate
of prepayments on the underlying mortgages serving as collateral. An
increase or decrease in prepayment rates (resulting from a decrease or
increase in mortgage interest rates) will affect the yield, average life
and price of CMOs. The prices of certain CMOs, depending on their
structure and the rate of prepayments, can be volatile. Some CMOs may
also not be as liquid as other securities.
o Stripped Agency Mortgage-Backed Securities. Stripped Agency
Mortgage-Backed securities represent interests in a pool of mortgages,
the cash flow of which has been separated into its interest and
principal components. "IOs" (interest only securities) receive the
interest portion of the cash flow while "POs" (principal only
securities) receive the principal portion. Stripped Agency
Mortgage-Backed Securities may be issued by U.S. Government Agencies or
by private issuers similar to those described below with respect to CMOs
and privately-issued mortgage-backed certificates. As interest rates
rise and fall, the value of IOs tends to move in the same direction as
interest rates. The value of the other mortgage-backed securities
described herein, like other debt instruments, will tend to move in the
opposite direction compared to interest rates. Under the Internal
Revenue Code of 1986, as amended (the "Code"), POs may generate taxable
income from the current accrual of original issue discount, without a
corresponding distribution of cash to the Fund.
The cash flows and yields on IO and PO classes are extremely sensitive
to the rate of principal payments (including prepayments) on the related
underlying mortgage assets. For example, a rapid or slow rate of
principal payments may have a material adverse effect on the prices of
IOs or POs, respectively. If the underlying mortgage assets experience
greater than anticipated prepayments of principal, an investor may fail
to recoup fully its initial investment in an IO class of a stripped
mortgage-backed security, even if the IO class is rated AAA or Aaa or is
derived from a full faith and credit obligation. Conversely, if the
underlying mortgage assets experience slower than anticipated
prepayments of principal, the price on a PO class will be affected more
severely than would be the case with a traditional mortgage-backed
security.
The staff of the Securities and Exchange Commission has advised the Fund
that it believes the Fund should treat IOs and POs, other than
government-issued IOs or POs backed by fixed rate mortgages, as illiquid
securities and, accordingly, limit its investments in such securities,
together with all other illiquid securities, to 15% of the Fund's net
assets. Under the Staff's position, the determination of whether a
particular government-issued IO and PO backed by fixed rate mortgages
may be made on a case by case basis under guidelines and standards
established by the Fund's Board of Directors/Trustees. The Fund's Board
of Directors/Trustees has delegated to T. Rowe Price the authority to
determine the liquidity of these investments based on the following
guidelines: the type of issuer; type of collateral, including age and
prepayment characteristics; rate of interest on coupon relative to
current market rates and the effect of the rate on the potential for
prepayments; complexity of the issue's structure, including the number
of tranches; size of the issue and the number of dealers who make a
market in the IO or PO. The Fund will treat non-government-issued IOs
and POs not backed by fixed or adjustable rate mortgages as illiquid
unless and until the Securities and Exchange Commission modifies its
position.
o Adjustable Rate Mortgages. Adjustable rate mortgage (ARM) securities are
collateralized by adjustable rate, rather than fixed rate, mortgages.
ARMs, like fixed rate mortgages, have a specified maturity date, and the
principal amount of the mortgage is repaid over the life of the
mortgage. Unlike fixed rate mortgages, the interest rate on ARMs is
adjusted at regular intervals based on a specified, published interest
rate "index" such as a Treasury rate index. The new rate is determined
by adding a specific interest amount, the "margin," to the interest rate
of the index. Investment in ARM securities allows the Fund to
participate in changing interest rate levels through regular adjustments
in the coupons of the underlying mortgages, resulting in more variable
current income and lower price volatility than longer term fixed rate
mortgage securities. The ARM securities in which the Fund expects to
invest will generally adjust their interest rates at regular intervals
of one year or less. ARM securities are a less effective means of
locking in long-term rates than fixed rate mortgages since the income
from adjustable rate mortgages will increase during periods of rising
interest rates and decline during periods of falling rates.
o Characteristics of Adjustable Rate Mortgage Securities - Interest Rate
Indices. The interest rates paid on adjustable rate securities are
readjusted periodically to an increment over some predetermined interest
rate index. Such readjustments occur at intervals ranging from one to
60 months. There are three main categories of indexes: (1) those based
on U.S. Treasury securities (2) those derived from a calculated measure
such as a cost of funds index ("COFI") or a moving average of mortgage
rates and (3) those based on actively traded or prominently posted
short-term, interest rates. Commonly utilized indexes include the
one-year, three-year and five-year constant maturity Treasury rates, the
three-month Treasury bill rate, the 180-day Treasury bill rate, rates on
longer-term Treasury securities, the 11th District Federal Home Loan
Bank Cost of Funds, the National Median Cost of Funds, the one-month,
three-month, six-month or one-year London Interbank Offered Rate
(LIBOR), the prime rate of a specific bank, or commercial paper rates.
Some indexes, such as the one-year constant maturity Treasury rate,
closely mirror changes in market interest rate levels. Others, such as
the 11th District Home Loan Bank Cost of Funds index, tend to lag behind
changes in market rate levels. The market value of the Fund's assets
and of the net asset value of the Fund's shares will be affected by the
length of the adjustment period, the degree of volatility in the
applicable indexes and the maximum increase or decrease of the interest
rate adjustment on any one adjustment date, in any one year and over the
life of the securities. These maximum increases and decreases are
typically referred to as "caps" and "floors", respectively.
A number of factors affect the performance of the Cost of Funds Index
and may cause the Cost of Funds Index to move in a manner different from
indices based upon specific interest rates, such as the One Year
Treasury Index. Additionally, there can be no assurance that the Cost
of Funds Index will necessarily move in the same direction or at the
same rate as prevailing interest rates. Furthermore, any movement in
the Cost of Funds Index as compared to other indices based upon specific
interest rates may be affected by changes instituted by the FHLB of San
Francisco in the method used to calculate the Cost of Funds Index. To
the extent that the Cost of Funds Index may reflect interest changes on
a more delayed basis than other indices, in a period of rising interest
rates, any increase may produce a higher yield later than would be
produced by such other indices, and in a period of declining interest
rates, the Cost of Funds Index may remain higher than other market
interest rates which may result in a higher level of principal
prepayments on mortgage loans which adjust in accordance with the Cost
of Funds Index than mortgage loans which adjust in accordance with other
indices.
LIBOR, the London interbank offered rate, is the interest rate that the
most creditworthy international banks dealing in U.S. dollar-denominated
deposits and loans charge each other for large dollar-denominated loans.
LIBOR is also usually the base rate for large dollar-denominated loans
in the international market. LIBOR is generally quoted for loans having
rate adjustments at one, three, six or 12 month intervals.
o Caps and Floors. ARMs will frequently have caps and floors which limit
the maximum amount by which the interest rate to the residential
borrower may move up or down, respectively, each adjustment period and
over the life of the loan. Interest rate caps on ARM securities may
cause them to decrease in value in an increasing interest rate
environment. Such caps may also prevent their income from increasing to
levels commensurate with prevailing interest rates. Conversely,
interest rate floors on ARM securities may cause their income to remain
higher than prevailing interest rate levels and result in an increase in
the value of such securities. However, this increase may be tempered by
the acceleration of prepayments.
Mortgage securities generally have a maximum maturity of up to 30 years.
However, due to the adjustable rate feature of ARM securities, their
prices are considered to have volatility characteristics which
approximate the average period of time until the next adjustment of the
interest rate. As a result, the principal volatility of ARM securities
may be more comparable to short- and intermediate-term securities than
to longer term fixed rate mortgage securities. Prepayments however,
will increase their principal volatility. See also the discussion of
Mortgage-Backed Securities on page 11.
o Other Mortgage Related Securities. The Fund expects that governmental,
government-related or private entities may create mortgage loan pools
offering pass-through investments in addition to those described above.
The mortgages underlying these securities may be alternative mortgage
instruments, that is, mortgage instruments whose principal or interest
payments may vary or whose terms to maturity may differ from customary
long-term fixed rate mortgages. As new types of mortgage-related
securities are developed and offered to investors, the investment
manager will, consistent with the Fund's objective, policies and quality
standards, consider making investments in such new types of securities.
Asset-Backed Securities (Limited-Term Bond and Personal Strategy Balanced
Funds)
The credit quality of most asset-backed securities depends primarily on the
credit quality of the assets underlying such securities, how well the entity
issuing the security is insulated from the credit risk of the originator or
any other affiliated entities and the amount and quality of any credit support
provided to the securities. The rate of principal payment on asset-backed
securities generally depends on the rate of principal payments received on the
underlying assets which in turn may be affected by a variety of economic and
other factors. As a result, the yield on any asset-backed security is
difficult to predict with precision and actual yield to maturity may be more
or less than the anticipated yield to maturity. Asset-backed securities may
be classified as pass-through certificates or collateralized obligations.
Pass-through certificates are asset-backed securities which represent an
undivided fractional ownership interest in an underlying pool of assets.
Pass-through certificates usually provide for payments of principal and
interest received to be passed through to their holders, usually after
deduction for certain costs and expenses incurred in administering the pool.
Because pass-through certificates represent an ownership interest in the
underlying assets, the holders thereof bear directly the risk of any defaults
by the obligors on the underlying assets not covered by any credit support.
See "Types of Credit Support".
Asset-backed securities issued in the form of debt instruments, also known as
collateralized obligations, are generally issued as the debt of a special
purpose entity organized solely for the purpose of owning such assets and
issuing such debt. Such assets are most often trade, credit card or
automobile receivables. The assets collateralizing such asset-backed
securities are pledged to a trustee or custodian for the benefit of the
holders thereof. Such issuers generally hold no assets other than those
underlying the asset-backed securities and any credit support provided. As a
result, although payments on such asset-backed securities are obligations of
the issuers, in the event of defaults on the underlying assets not covered by
any credit support (see "Types of Credit Support"), the issuing entities are
unlikely to have sufficient assets to satisfy their obligations on the related
asset-backed securities.
Methods of Allocating Cash Flows. While many asset-backed securities are
issued with only one class of security, many asset-backed securities are
issued in more than one class, each with different payment terms. Multiple
class asset-backed securities are issued for two main reasons. First,
multiple classes may be used as a method of providing credit support.
This is accomplished typically through creation of one or more classes whose
right to payments on the asset-backed security is made subordinate to the
right to such payments of the remaining class or classes. See "Types of
Credit Support". Second, multiple classes may permit the issuance of
securities with payment terms, interest rates or other characteristics
differing both from those of each other and from those of the underlying
assets. Examples include so-called "strips" (asset-backed securities
entitling the holder to disproportionate interests with respect to the
allocation of interest and principal of the assets backing the security), and
securities with class or classes having characteristics which mimic the
characteristics of non-asset-backed securities, such as floating interest
rates (i.e., interest rates which adjust as a specified benchmark changes) or
scheduled amortization of principal.
Asset-backed securities in which the payment streams on the underlying assets
are allocated in a manner different than those described above may be issued
in the future. The Fund may invest in such asset-backed securities if such
investment is otherwise consistent with its investment objectives and policies
and with the investment restrictions of the Fund.
Types of Credit Support. Asset-backed securities are often backed by a pool of
assets representing the obligations of a number of different parties. To
lessen the effect of failures by obligors on underlying assets to make
payments, such securities may contain elements of credit support. Such credit
support falls into two classes: liquidity protection and protection against
ultimate default by an obligor on the underlying assets. Liquidity protection
refers to the provision of advances, generally by the entity administering the
pool of assets, to ensure that scheduled payments on the underlying pool are
made in a timely fashion. Protection against ultimate default ensures
ultimate payment of the obligations on at least a portion of the assets in the
pool. Such protection may be provided through guarantees, insurance policies
or letters of credit obtained from third parties, through various means of
structuring the transaction or through a combination of such approaches.
Examples of asset-backed securities with credit support arising out of the
structure of the transaction include "senior-subordinated securities"
(multiple class asset-backed securities with certain classes subordinate to
other classes as to the payment of principal thereon, with the result that
defaults on the underlying assets are borne first by the holders of the
subordinated class) and asset-backed securities that have "reserve funds"
(where cash or investments, sometimes funded from a portion of the initial
payments on the underlying assets, are held in reserve against future losses)
or that have been "over collateralized" (where the scheduled payments on, or
the principal amount of, the underlying assets substantially exceeds that
required to make payment of the asset-backed securities and pay any servicing
or other fees). The degree of credit support provided on each issue is based
generally on historical information respecting the level of credit risk
associated with such payments. Delinquency or loss in excess of that
anticipated ould adversely affect the return on an investment in an
asset-backed security.
Automobile Receivable Securities. Each Fund may invest in Asset Backed
Securities which are backed by receivables from motor vehicle installment
sales contracts or installment loans secured by motor vehicles ("Automobile
Receivable Securities"). Since installment sales contracts for motor vehicles
or installment loans related thereto ("Automobile Contracts") typically have
shorter durations and lower incidences of prepayment, Automobile Receivable
Securities generally will exhibit a shorter average life and are less
susceptible to prepayment risk.
Most entities that issue Automobile Receivable Securities create an
enforceable interest in their respective Automobile Contracts only by filing a
financing statement and by having the servicer of the Automobile Contracts,
which is usually the originator of the Automobile Contracts, take custody
thereof. In such circumstances, if the servicer of the Automobile Contracts
were to sell the same Automobile Contracts to another party, in violation of
its obligation not to do so, there is a risk that such party could acquire an
interest in the Automobile Contracts superior to that of the holders of
Automobile Receivable Securities. Also although most Automobile Contracts
grant a security interest in the motor vehicle being financed, in most states
the security interest in a motor vehicle must be noted on the certificate of
title to create an enforceable security interest against competing claims of
other parties. Due to the large number of vehicles involved, however, the
certificate of title to each vehicle financed, pursuant to the Automobile
Contracts underlying the Automobile Receivable Security, usually is not
amended to reflect the assignment of the seller's security interest for the
benefit of the holders of the Automobile Receivable Securities. Therefore,
there is the possibility that recoveries on repossessed collateral may not, in
some cases, be available to support payments on the securities. In addition,
various state and federal securities laws give the motor vehicle owner the
right to assert against the holder of the owner's Automobile Contract certain
defenses such owner would have against the seller of the motor vehicle. The
assertion of such defenses could reduce payments on the Automobile Receivable
Securities.
Credit Card Receivable Securities. The Fund may invest in Asset Backed
Securities backed by receivables from revolving credit card agreements
("Credit Card Receivable Securities"). Credit balances on revolving credit
card agreements ("Accounts") are generally paid down more rapidly than are
Automobile Contracts. Most of the Credit Card Receivable Securities issued
publicly to date have been Pass-Through Certificates. In order to lengthen
the maturity of Credit Card Receivable Securities, most such securities
provide for a fixed period during which only interest payments on the
underlying Accounts are passed through to the security holder and principal
payments received on such Accounts are used to fund the transfer to the pool
of assets supporting the related Credit Card Receivable Securities of
additional credit card charges made on an Account. The initial fixed period
usually may be shortened upon the occurrence of specified events which signal
a potential deterioration in the quality of the assets backing the security,
such as the imposition of a cap on interest rates. The ability of the issuer
to extend the life of an issue of Credit Card Receivable Securities thus
depends upon the continued generation of additional principal amounts in the
underlying accounts during the initial period and the non-occurrence of
specified events. An acceleration in cardholders' payment rates or any other
event which shortens the period during which additional credit card charges on
an Account may be transferred to the pool of assets supporting the related
Credit Card Receivable Security could shorten the weighted average life and
yield of the Credit Card Receivable Security.
Credit cardholders are entitled to the protection of a number of state and
federal consumer credit laws, many of which give such holder the right to set
off certain amounts against balances owed on the credit card, thereby reducing
amounts paid on Accounts. In addition, unlike most other Asset Backed
Securities, Accounts are unsecured obligations of the cardholder.
Other Assets. T. Rowe Price anticipates that Asset Backed Securities backed by
assets other than those described above will be issued in the future. The
Fund may invest in such securities in the future if such investment is
otherwise consistent with its investment objective and policies.
There are, of course, other types of securities that are, or may become
available, which are similar to the foregoing and the Fund reserves the right
to invest in these securities.
Zero Coupon and Pay-in-Kind Bonds (Personal Strategy Balanced Fund)
A zero coupon security has no cash coupon payments. Instead, the issuer sells
the security at a substantial discount from its maturity value. The interest
received by the investor from holding this security to maturity is the
difference between the maturity value and the purchase price. The advantage
to the investor is that reinvestment risk of the income received during the
life of the bond is eliminated. However, zero-coupon bonds like other bonds
retain interest rate and credit risk and usually display more price volatility
than those securities that pay a cash coupon.
Pay-in-Kind (PIK) Instruments are securities that pay interest in either cash
or additional securities, at the issuer's option, for a specified period.
PIK's, like zero coupon bonds, are designed to give an issuer flexibility in
managing cash flow. PIK bonds can be either senior or subordinated debt and
trade flat (i.e., without accrued interest). The price of PIK bonds is
expected to reflect the market value of the underlying debt plus an amount
representing accrued interest since the last payment. PIK's are usually less
volatile than zero coupon bonds, but more volatile than cash pay securities.
For federal income tax purposes, these types of bonds will require the
recognition of gross income each year even though no cash may be paid to the
Fund until the maturity or call date of the bond. The Fund will nonetheless
be required to distribute substantially all of this gross income each year to
comply with the Internal Revenue Code, and such distributions could reduce the
amount of cash available for investment by the Fund.
Hybrid Instruments (All Funds)
Hybrid Instruments have been developed and combine the elements of futures
contracts or options with those of debt, preferred equity or a depository
instrument (hereinafter "Hybrid Instruments"). Generally, a Hybrid Instrument
will be a debt security, preferred stock, depository share, trust certificate,
certificate of deposit or other evidence of indebtedness on which a portion of
or all interest payments, and/or the principal or stated amount payable at
maturity, redemption or retirement, is determined by reference to prices,
changes in prices, or differences between prices, of securities, currencies,
intangibles, goods, articles or commodities (collectively "Underlying Assets")
or by another objective index, economic factor or other measure, such as
interest rates, currency exchange rates, commodity indices, and securities
indices (collectively "Benchmarks"). Thus, Hybrid Instruments may take a
variety of forms, including, but not limited to, debt instruments with
interest or principal payments or redemption terms determined by reference to
the value of a currency or commodity or securities index at a future point in
time, preferred stock with dividend rates determined by reference to the value
of a currency, or convertible securities with the conversion terms related to
a particular commodity.
Hybrid Instruments can be an efficient means of creating exposure to a
particular market, or segment of a market, with the objective of enhancing
total return. For example, the Fund may wish to take advantage of expected
declines in interest rates in several European countries, but avoid the
transactions costs associated with buying and currency-hedging the foreign
bond positions. One solution would be to purchase a U.S. dollar-denominated
Hybrid Instrument whose redemption price is linked to the average three year
interest rate in a designated group of countries. The redemption price
formula would provide for payoffs of greater than par if the average interest
rate was lower than a specified level, and payoffs of less than par if rates
were above the specified level. Furthermore, the Fund could limit the
downside risk of the security by establishing a minimum redemption price so
that the principal paid at maturity could not be below a predetermined minimum
level if interest rates were to rise significantly. The purpose of this
arrangement, known as a structured security with an embedded put option, would
be to give the Fund the desired European bond exposure while avoiding currency
risk, limiting downside market risk, and lowering transactions costs. Of
course, there is no guarantee that the strategy will be successful and the
Fund could lose money if, for example, interest rates do not move as
anticipated or credit problems develop with the issuer of the Hybrid.
The risks of investing in Hybrid Instruments reflect a combination of the
risks of investing in securities, options, futures and currencies. Thus, an
investment in a Hybrid Instrument may entail significant risks that are not
associated with a similar investment in a traditional debt instrument that has
a fixed principal amount, is denominated in U.S. dollars or bears interest
either at a fixed rate or a floating rate determined by reference to a common,
nationally published Benchmark. The risks of a particular Hybrid Instrument
will, of course, depend upon the terms of the instrument, but may include,
without limitation, the possibility of significant changes in the Benchmarks
or the prices of Underlying Assets to which the instrument is linked. Such
risks generally depend upon factors which are unrelated to the operations or
credit quality of the issuer of the Hybrid Instrument and which may not be
readily foreseen by the purchaser, such as economic and political events, the
supply and demand for the Underlying Assets and interest rate movements. In
recent years, various Benchmarks and prices for Underlying Assets have been
highly volatile, and such volatility may be expected in the future. Reference
is also made to the discussion of futures, options, and forward contracts
herein for a discussion of the risks associated with such investments.
Hybrid Instruments are potentially more volatile and carry greater market
risks than traditional debt instruments. Depending on the structure of the
particular Hybrid Instrument, changes in a Benchmark may be magnified by the
terms of the Hybrid Instrument and have an even more dramatic and substantial
effect upon the value of the Hybrid Instrument. Also, the prices of the
Hybrid Instrument and the Benchmark or Underlying Asset may not move in the
same direction or at the same time.
Hybrid Instruments may bear interest or pay preferred dividends at below
market (or even relatively nominal) rates. Alternatively, Hybrid Instruments
may bear interest at above market rates but bear an increased risk of
principal loss (or gain). The latter scenario may result if "leverage" is
used to structure the Hybrid Instrument. Leverage risk occurs when the Hybrid
Instrument is structured so that a given change in a Benchmark or Underlying
Asset is multiplied to produce a greater value change in the Hybrid
Instrument, thereby magnifying the risk of loss as well as the potential for
gain.
Hybrid Instruments may also carry liquidity risk since the instruments are
often "customized" to meet the portfolio needs of a particular investor, and
therefore, the number of investors that are willing and able to buy such
instruments in the secondary market may be smaller than that for more
traditional debt securities. In addition, because the purchase and sale of
Hybrid Instruments could take place in an over-the-counter market without the
guarantee of a central clearing organization or in a transaction between the
Fund and the issuer of the Hybrid Instrument, the creditworthiness of the
counter party or issuer of the Hybrid Instrument would be an additional risk
factor which the Fund would have to consider and monitor. Hybrid Instruments
also may not be subject to regulation of the Commodities Futures Trading
Commission ("CFTC"), which generally regulates the trading of commodity
futures by U.S. persons, the SEC, which regulates the offer and sale of
securities by and to U.S. persons, or any other governmental regulatory
authority.
The various risks discussed above, particularly the market risk of such
instruments, may in turn cause significant fluctuations in the net asset value
of the Fund. Accordingly, each Fund will limit its investments in Hybrid
Instruments to 10% of net assets. However, because of their volatility, it is
possible that the Fund's investment in Hybrid Instruments will account for
more than 10% of the Fund's return (positive or negative).
When-Issued Securities and Forward Commitment Contracts (Limited-Term Bond and
Personal Strategy Balanced Funds)
Each Fund may purchase securities on a "when-issued" or delayed delivery basis
("When-Issueds") and may purchase securities on a forward commitment basis
("Forwards"). Any or all of the Fund's investments in debt securities may be
in the form of When-Issueds and Forwards. The price of such securities, which
may be expressed in yield terms, is fixed at the time the commitment to
purchase is made, but delivery and payment take place at a later date.
Normally, the settlement date occurs within 90 days of the purchase for
When-Issueds, but may be substantially longer for Forwards. During the period
between purchase and settlement, no payment is made by the Fund to the issuer
and no interest accrues to the Fund. The purchase of these securities will
result in a loss if their value declines prior to the settlement date. This
could occur, for example, if interest rates increase prior to settlement. The
longer the period between purchase and settlement, the greater the risks are.
At the time the Fund makes the commitment to purchase these securities, it
will record the transaction and reflect the value of the security in
determining its net asset value. The Fund will cover these securities by
maintaining cash and/or liquid, high-grade debt securities with its custodian
bank equal in value to commitments for them during the time between the
purchase and the settlement. Therefore, the longer this period, the longer
the period during which alternative investment options are not available to
the Fund (to the extent of the securities used for cover). Such securities
either will mature or, if necessary, be sold on or before the settlement date.
To the extent the Fund remains fully or almost fully invested (in securities
with a remaining maturity of more than one year) at the same time it purchases
these securities, there will be greater fluctuations in the Fund's net asset
value than if the Fund did not purchase them.
Additional Adjustable Rate Securities (Limited-Term Bond and Personal Strategy
Balanced Funds)
Certain 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:
o 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. 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 rate. A variable rate
instrument which is subject to a demand feature entitles the purchaser
to receive the principal amount of the underlying security or
securities, either (i) upon notice of no more than 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.
o 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. 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. 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.
o 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.
Illiquid or Restricted Securities (All Funds)
Restricted securities may be sold only in privately negotiated transactions or
in a public offering with respect to which a registration statement is in
effect under the Securities Act of 1933 (the "1933 Act"). Where registration
is required, the Fund may be obligated to pay all or part of the registration
expenses and a considerable period may elapse between the time of the decision
to sell and the time the Fund may be permitted to sell a security under an
effective registration statement. If, during such a period, adverse market
conditions were to develop, the Fund might obtain a less favorable price than
prevailed when it decided to sell. Restricted securities will be priced at
fair value as determined in accordance with procedures prescribed by the
Fund's Board of Directors. If through the appreciation of illiquid securities
or the depreciation of liquid securities, the Fund should be in a position
where more than 15% of the value of its net assets is invested in illiquid
assets, including restricted securities, the Fund will take appropriate steps
to protect liquidity.
Notwithstanding the above, each Fund may purchase securities which, while
privately placed, are eligible for purchase and sale under Rule 144A under the
1933 Act. This rule permits certain qualified institutional buyers, such as
the Fund, to trade in privately placed securities even though such securities
are not registered under the 1933 Act. The Manager under the supervision of
the Fund's Board of Directors/Trustees, will consider whether securities
purchased under Rule 144A are illiquid and thus subject to the Fund's
restriction of investing no more than 15% of its net assets in illiquid
securities. A determination of whether a Rule 144A security is liquid or not
is a question of fact. In making this determination, the Manager will
consider the trading markets for the specific security taking into account the
unregistered nature of a Rule 144A security. In addition, the Manager could
consider the (1) frequency of trades and quotes, (2) number of dealers and
potential purchases, (3) dealer undertakings to make a market, and (4) the
nature of the security and of marketplace trades (e.g., the time needed to
dispose of the security, the method of soliciting offers and the mechanics of
transfer). The liquidity of Rule 144A securities would be monitored, and if
as a result of changed conditions it is determined that a Rule 144A security
is no longer liquid, the Fund's holdings of illiquid securities would be
reviewed to determine what, if any, steps are required to assure that the Fund
does not invest more than 15% of its net assets in illiquid securities.
Investing in Rule 144A securities could have the effect of increasing the
amount of the Fund's assets invested in illiquid securities if qualified
institutional buyers are unwilling to purchase such securities.
Warrants (All Funds)
Each Fund may acquire warrants. Warrants are pure speculation in that they
have no voting rights, pay no dividends and have no rights with respect to the
assets of the corporation issuing them. Warrants basically are options to
purchase equity securities at a specific price valid for a specific period of
time. They do not represent ownership of the securities, but only the right
to buy them. Warrants differ from call options in that warrants are issued by
the issuer of the security which may be purchased on their exercise, whereas
call options may be written or issued by anyone. The prices of warrants do
not necessarily move parallel to the prices of the underlying securities.
There are, of course, other types of securities that are, or may become
available, which are similar to the foregoing and each Fund may invest in
these securities.
__________________________________________________________________________
PORTFOLIO MANAGEMENT
PRACTICES (ALL FUNDS)
Lending of Portfolio Securities
Securities loans are made to broker-dealers or institutional investors or
other persons, pursuant to agreements requiring that the loans be continuously
secured by collateral at least equal at all times to the value of the
securities lent marked to market on a daily basis. The collateral received
will consist of cash, U.S. government securities, letters of credit or such
other collateral as may be permitted under its investment program. While the
securities are being lent, the Fund will continue to receive the equivalent of
the interest or dividends paid by the issuer on the securities, as well as
interest on the investment of the collateral or a fee from the borrower. The
Fund has a right to call each loan and obtain the securities on five business
days' notice or, in connection with securities trading on foreign markets,
within such longer period of time which coincides with the normal settlement
period for purchases and sales of such securities in such foreign markets.
The Fund will not have the right to vote securities while they are being lent,
but it will call a loan in anticipation of any important vote. The risks in
lending portfolio securities, as with other extensions of secured credit,
consist of possible delay in receiving additional collateral or in the
recovery of the securities or possible loss of rights in the collateral should
the borrower fail financially. Loans will only be made to firms deemed by the
Manager to be of good standing and will not be made unless, in the judgment of
the Manager, the consideration to be earned from such loans would justify the
risk.
Other Lending/Borrowing
Subject to approval by the Securities and Exchange Commission and certain
state regulatory agencies, the Fund may make loans to, or borrow funds from,
other mutual funds sponsored or advised by T. Rowe Price or Price-Fleming
(collectively, "Price Funds"). None of the Funds have current intentions of
engaging in these practices at this time.
Repurchase Agreements
Each Fund may enter into a repurchase agreement through which an investor
(such as the Fund) purchases a security (known as the "underlying security")
from a well-established securities dealer or a bank that is a member of the
Federal Reserve System. Any such dealer or bank will be on the Manager's
approved list.
At that time, the bank or securities dealer agrees to repurchase the
underlying security at the same price, plus specified interest. Repurchase
agreements are generally for a short period of time, often less than a week.
Repurchase agreements which do not provide for payment within seven days will
be treated as illiquid securities. The Fund will only enter into repurchase
agreements where (i) the underlying securities are of the type (excluding
maturity limitations) which the Fund's investment guidelines would allow it to
purchase directly, (ii) the market value of the underlying security, including
interest accrued, will be at all times equal to or exceed the value of the
repurchase agreement, and (iii) payment for the underlying security is made
only upon physical delivery or evidence of book-entry transfer to the account
of the custodian or a bank acting as agent. In the event of a bankruptcy or
other default of a seller of a repurchase agreement, the Fund could experience
both delays in liquidating the underlying security and losses, including: (a)
possible decline in the value of the underlying security during the period
while the Fund seeks to enforce its rights thereto; (b) possible subnormal
levels of income and lack of access to income during this period; and (c)
expenses of enforcing its rights.
Reverse Repurchase Agreements (Limited-Term Bond and Personal Strategy
Balanced Funds)
Although neither Fund has current intentions, in the foreseeable future, of
engaging in reverse repurchase agreements, each Fund reserves the right to do
so. Reverse repurchase agreements are ordinary repurchase agreements in which
the Fund is the seller of, rather than the investor in, securities, and agrees
to repurchase them at an agreed upon time and price. Use of a reverse
repurchase agreement may be preferable to a regular sale and later repurchase
of the securities because it avoids certain market risks and transaction
costs. A reverse repurchase agreement may be viewed as a type of borrowing by
the Fund, subject to Investment Restriction (1). (See "Investment
Restrictions," page 44.)
Options
Options are a type of potentially high risk derivative.
o Writing Covered Call Options. Each Fund may write (sell) American or
European style "covered" call options and purchase options to close out
options previously written by the Fund. In writing covered call
options, the Fund expects to generate additional premium income which
should serve to enhance the Fund's total return and reduce the effect of
any price decline of the security or currency involved in the option.
Covered call options will generally be written on securities or
currencies which, in the Manager's opinion, are not expected to have any
major price increases or moves in the near future but which, over the
long term, are deemed to be attractive investments for the Fund.
A call option gives the holder (buyer) the "right to purchase" a
security or currency at a specified price (the exercise price) at
expiration of the option (European style) or at any time until a certain
date (the expiration date) (American style). So long as the obligation
of the writer of a call option continues, he may be assigned an exercise
notice by the broker-dealer through whom such option was sold, requiring
him to deliver the underlying security or currency against payment of
the exercise price. This obligation terminates upon the expiration of
the call option, or such earlier time at which the writer effects a
closing purchase transaction by repurchasing an option identical to that
previously sold. To secure his obligation to deliver the underlying
security or currency in the case of a call option, a writer is required
to deposit in escrow the underlying security or currency or other assets
in accordance with the rules of a clearing corporation.
Each Fund will write only covered call options. This means that the
Fund will own the security or currency subject to the option or an
option to purchase the same underlying security or currency, having an
exercise price equal to or less than the exercise price of the "covered"
option, or will establish and maintain with its custodian for the term
of the option, an account consisting of cash, U.S. government securities
or other liquid high-grade debt obligations having a value equal to the
fluctuating market value of the optioned securities or currencies.
Portfolio securities or currencies on which call options may be written
will be purchased solely on the basis of investment considerations
consistent with each Fund's investment objective. The writing of
covered call options is a conservative investment technique believed to
involve relatively little risk (in contrast to the writing of naked or
uncovered options, which the Fund will not do), but capable of enhancing
the Fund's total return. When writing a covered call option, the Fund,
in return for the premium, gives up the opportunity for profit from a
price increase in the underlying security or currency above the exercise
price, but conversely retains the risk of loss should the price of the
security or currency decline. Unlike one who owns securities or
currencies not subject to an option, the Fund has no control over when
it may be required to sell the underlying securities or currencies,
since it may be assigned an exercise notice at any time prior to the
expiration of its obligation as a writer. If a call option which the
Fund has written expires, the Fund will realize a gain in the amount of
the premium; however, such gain may be offset by a decline in the market
value of the underlying security or currency during the option period.
If the call option is exercised, the Fund will realize a gain or loss
from the sale of the underlying security or currency. The Fund does not
consider a security or currency covered by a call to be "pledged" as
that term is used in the Fund's policy which limits the pledging or
mortgaging of its assets.
The premium received is the market value of an option. The premium the
Fund will receive from writing a call option will reflect, among other
things, the current market price of the underlying security or currency,
the relationship of the exercise price to such market price, the
historical price volatility of the underlying security or currency, and
the length of the option period. Once the decision to write a call
option has been made, the Manager, in determining whether a particular
call option should be written on a particular security or currency, will
consider the reasonableness of the anticipated premium and the
likelihood that a liquid secondary market will exist for those options.
The premium received by the Fund for writing covered call options will
be recorded as a liability of that Fund. This liability will be
adjusted daily to the option's current market value, which will be the
latest sale price at the time at which the net asset value per share of
each Fund is computed (close of the New York Stock Exchange), or, in the
absence of such sale, the latest asked price. The option will be
terminated upon expiration of the option, the purchase of an identical
option in a closing transaction, or delivery of the underlying security
or currency upon the exercise of the option.
Closing transactions will be effected in order to realize a profit on an
outstanding call option, to prevent an underlying security or currency
from being called, or, to permit the sale of the underlying security or
currency. Furthermore, effecting a closing transaction will permit the
Fund to write another call option on the underlying security or currency
with either a different exercise price or expiration date or both. If
the Fund desires to sell a particular security or currency from its
portfolio on which it has written a call option, or purchased a put
option, it will seek to effect a closing transaction prior to, or
concurrently with, the sale of the security or currency. There is, of
course, no assurance that any Fund will be able to effect such closing
transactions at favorable prices. If the Fund cannot enter into such a
transaction, it may be required to hold a security or currency that it
might otherwise have sold. When the Fund writes a covered call option,
it runs the risk of not being able to participate in the appreciation of
the underlying securities or currencies above the exercise price, as
well as the risk of being required to hold on to securities or
currencies that are depreciating in value. This could result in higher
transaction costs. Each Fund will pay transaction costs in connection
with the writing of options to close out previously written options.
Such transaction costs are normally higher than those applicable to
purchases and sales of portfolio securities.
Call options written by the Fund will normally have expiration dates of
less than nine months from the date written. The exercise price of the
options may be below, equal to, or above the current market values of
the underlying securities or currencies at the time the options are
written. From time to time, the Fund may purchase an underlying
security or currency for delivery in accordance with an exercise notice
of a call option assigned to it, rather than delivering such security or
currency from its portfolio. In such cases, additional costs may be
incurred.
The Fund will realize a profit or loss from a closing purchase
transaction if the cost of the transaction is less or more than the
premium received from the writing of the option. Because increases in
the market price of a call option will generally reflect increases in
the market price of the underlying security or currency, any loss
resulting from the repurchase of a call option is likely to be offset in
whole or in part by appreciation of the underlying security or currency
owned by the Fund.
In order to comply with the requirements of several states, the Fund
will not write a covered call option if, as a result, the aggregate
market value of all portfolio securities or currencies covering call or
put options exceeds 25% of the market value of the Fund's net assets.
Should these state laws change or should the Fund obtain a waiver of its
application, the Fund reserves the right to increase this percentage.
In calculating the 25% limit, the Fund will offset, against the value of
assets covering written calls and puts, the value of purchased calls and
puts on identical securities or currencies with identical maturity
dates.
o Writing Covered Put Options. Each Fund may write American or European
style covered put options and purchase options to close out options
previously written by the Fund. A put option gives the purchaser of the
option the right to sell, and the writer (seller) has the obligation to
buy, the underlying security or currency at the exercise price during
the option period (American style) or at the expiration of the option
(European style). So long as the obligation of the writer continues, he
may be assigned an exercise notice by the broker-dealer through whom
such option was sold, requiring him to make payment of the exercise
price against delivery of the underlying security or currency. The
operation of put options in other respects, including their related
risks and rewards, is substantially identical to that of call options.
The Fund would write put options only on a covered basis, which means
that the Fund would maintain in a segregated account cash, U.S.
government securities or other liquid high-grade debt obligations in an
amount not less than the exercise price or the Fund will own an option
to sell the underlying security or currency subject to the option having
an exercise price equal to or greater than the exercise price of the
"covered" option at all times while the put option is outstanding. (The
rules of a clearing corporation currently require that such assets be
deposited in escrow to secure payment of the exercise price.)
The Fund would generally write covered put options in circumstances
where the Manager wishes to purchase the underlying security or currency
for the Fund's portfolio at a price lower than the current market price
of the security or currency. In such event the Fund would write a put
option at an exercise price which, reduced by the premium received on
the option, reflects the lower price it is willing to pay. Since the
Fund would also receive interest on debt securities or currencies
maintained to cover the exercise price of the option, this technique
could be used to enhance current return during periods of market
uncertainty. The risk in such a transaction would be that the market
price of the underlying security or currency would decline below the
exercise price less the premiums received. Such a decline could be
substantial and result in a significant loss to the Fund. In addition,
the Fund, because it does not own the specific securities or currencies
which it may be required to purchase in exercise of the put, cannot
benefit from appreciation, if any, with respect to such specific
securities or currencies.
In order to comply with the requirements of several states, the Fund
will not write a covered put option if, as a result, the aggregate
market value of all portfolio securities or currencies covering put or
call options exceeds 25% of the market value of the Fund's net assets.
Should these state laws change or should the Fund obtain a waiver of its
application, the Fund reserves the right to increase this percentage.
In calculating the 25% limit, the Fund will offset, against the value of
assets covering written puts and calls, the value of purchased puts and
calls on identical securities or currencies with identical maturity
dates.
o Purchasing Put Options. Each Fund may purchase American or European
style put options. As the holder of a put option, the Fund has the
right to sell the underlying security or currency at the exercise price
at any time during the option period (American style) or at the
expiration of the option (European style). The Fund may enter into
closing sale transactions with respect to such options, exercise them or
permit them to expire. The Fund may purchase put options for defensive
purposes in order to protect against an anticipated decline in the value
of its securities or currencies. An example of such use of put options
is provided below.
Each Fund may purchase a put option on an underlying security or
currency (a "protective put") owned by the Fund as a defensive technique
in order to protect against an anticipated decline in the value of the
security or currency. Such hedge protection is provided only during the
life of the put option when the Fund, as the holder of the put option,
is able to sell the underlying security or currency at the put exercise
price regardless of any decline in the underlying security's market
price or currency's exchange value. For example, a put option may be
purchased in order to protect unrealized appreciation of a security or
currency where the Manager deems it desirable to continue to hold the
security or currency because of tax considerations. The premium paid
for the put option and any transaction costs would reduce any capital
gain otherwise available for distribution when the security or currency
is eventually sold.
The Fund may also purchase put options at a time when the Fund does not
own the underlying security or currency. By purchasing put options on a
security or currency it does not own, the Fund seeks to benefit from a
decline in the market price of the underlying security or currency. If
the put option is not sold when it has remaining value, and if the
market price of the underlying security or currency remains equal to or
greater than the exercise price during the life of the put option, the
Fund will lose its entire investment in the put option. In order for
the purchase of a put option to be profitable, the market price of the
underlying security or currency must decline sufficiently below the
exercise price to cover the premium and transaction costs, unless the
put option is sold in a closing sale transaction.
To the extent required by the laws of certain states, the Fund may not
be permitted to commit more than 5% of its assets to premiums when
purchasing put and call options. Should these state laws change or
should the Fund obtain a waiver of its application, the Fund may commit
more than 5% of its assets to premiums when purchasing call and put
options. The premium paid by the Fund when purchasing a put option will
be recorded as an asset of the Fund. This asset will be adjusted daily
to the option's current market value, which will be the latest sale
price at the time at which the net asset value per share of the Fund is
computed (close of New York Stock Exchange), or, in the absence of such
sale, the latest bid price. This asset will be terminated upon
expiration of the option, the selling (writing) of an identical option
in a closing transaction, or the delivery of the underlying security or
currency upon the exercise of the option.
o Purchasing Call Options. Each Fund may purchase American or European
style call options. As the holder of a call option, the Fund has the
right to purchase the underlying security or currency at the exercise
price at any time during the option period (American style) or at the
expiration of the option (European style). The Fund may enter into
closing sale transactions with respect to such options, exercise them or
permit them to expire. The Fund may purchase call options for the
purpose of increasing its current return or avoiding tax consequences
which could reduce its current return. The Fund may also purchase call
options in order to acquire the underlying securities or currencies.
Examples of such uses of call options are provided below.
Call options may be purchased by the Fund for the purpose of acquiring
the underlying securities or currencies for its portfolio. Utilized in
this fashion, the purchase of call options enables the Fund to acquire
the securities or currencies at the exercise price of the call option
plus the premium paid. At times the net cost of acquiring securities or
currencies in this manner may be less than the cost of acquiring the
securities or currencies directly. This technique may also be useful to
the Fund in purchasing a large block of securities or currencies that
would be more difficult to acquire by direct market purchases. So long
as it holds such a call option rather than the underlying security or
currency itself, the Fund is partially protected from any unexpected
decline in the market price of the underlying security or currency and
in such event could allow the call option to expire, incurring a loss
only to the extent of the premium paid for the option.
To the extent required by the laws of certain states, the Fund may not
be permitted to commit more than 5% of its assets to premiums when
purchasing call and put options. Should these state laws change or
should the Fund obtain a waiver of its application, that Fund may commit
more than 5% of its assets to premiums when purchasing call and put
options. The Fund may also purchase call options on underlying
securities or currencies it owns in order to protect unrealized gains on
call options previously written by it. A call option would be purchased
for this purpose where tax considerations make it inadvisable to realize
such gains through a closing purchase transaction. Call options may
also be purchased at times to avoid realizing losses.
o Dealer (Over-the-Counter) Options. Each Fund may engage in transactions
involving dealer options. Certain risks are specific to dealer options.
While the Fund would look to a clearing corporation to exercise
exchange-traded options, if the Fund were to purchase a dealer option,
it would rely on the dealer from whom it purchased the option to perform
if the option were exercised. Failure by the dealer to do so would
result in the loss of the premium paid by the Fund as well as loss of
the expected benefit of the transaction.
Exchange-traded options generally have a continuous liquid market while
dealer options have none. Consequently, the Fund will generally be able
to realize the value of a dealer option it has purchased only by
exercising it or reselling it to the dealer who issued it. Similarly,
when the Fund writes a dealer option, it generally will be able to close
out the option prior to its expiration only by entering into a closing
purchase transaction with the dealer to which the Fund originally wrote
the option. While the Fund will seek to enter into dealer options only
with dealers who will agree to and which are expected to be capable of
entering into closing transactions with that Fund, there can be no
assurance that the Fund will be able to liquidate a dealer option at a
favorable price at any time prior to expiration. Until the Fund, as a
covered dealer call option writer, is able to effect a closing purchase
transaction, it will not be able to liquidate securities (or other
assets) or currencies used as cover until the option expires or is
exercised. In the event of insolvency of the contra party, the Fund may
be unable to liquidate a dealer option. With respect to options written
by the Fund, the inability to enter into a closing transaction may
result in material losses to that Fund. For example, since the Fund
must maintain a secured position with respect to any call option on a
security it writes, the Fund may not sell the assets which it has
segregated to secure the position while it is obligated under the
option. This requirement may impair the Fund's ability to sell
portfolio securities or currencies at a time when such sale might be
advantageous.
The Staff of the SEC has taken the position that purchased dealer
options and the assets used to secure the written dealer options are
illiquid securities. The Fund may treat the cover used for written OTC
options as liquid if the dealer agrees that the Fund may repurchase the
OTC option it has written for a maximum price to be calculated by a
predetermined formula. In such cases, the OTC option would be
considered illiquid only to the extent the maximum repurchase price
under the formula exceeds the intrinsic value of the option.
Accordingly, the Fund will treat dealer options as subject to the Fund's
limitation on illiquid securities. If the SEC changes its position on
the liquidity of dealer options, the Fund will change its treatment of
such instrument accordingly.
Interest Rate Transactions (Limited-Term Bond Portfolio)
This Fund may enter into various interest rate transactions such as interest
rate swaps and the purchase or sale of interest rate caps and floors, to
preserve a return or spread on a particular investment or portion of its
portfolio, to create synthetic securities, or to structure transactions
designed for other non-speculative purposes.
Interest rate swaps involve the exchange by the Fund with third parties of its
respective commitments to pay or receive interest, e.g., an exchange of
floating rate payments for fixed rate payments. The purchase of an interest
rate cap entitles the purchaser, to the extent that a specified index exceeds
a predetermined interest rate, to receive payments of interest on a
contractually-based principal amount from the party selling the interest rate
cap. The purchase of an interest rate floor entitles the purchaser, to the
extent that a specified index falls below a predetermined interest rate, to
receive payments of interest on a contractually-based principal amount from
the party selling the interest rate floor. In circumstances in which the
Manager anticipates that interest rates will decline, the Fund might, for
example, enter into an interest rate swap as the floating rate payor. In the
case where the Fund purchases such an interest rate swap, if the floating rate
payments fell below the level of the fixed rate payment set in the swap
agreement, the Fund's counterparties would pay the Fund's amounts equal to
interest computed at the difference between the fixed and floating rates over
the national principal amount. Such payments would offset or partially offset
the decrease in the payments the Fund would receive in respect of floating
rate assets being hedged. In the case of purchasing an interest rate floor,
if interest rates declined below the floor rate, the Fund would receive
payments from the counterparties which would wholly or partially offset the
decrease in the payments they would receive in respect of the financial
instruments being hedged.
The Fund will usually enter into interest rate swaps on a net basis, i.e., the
two payment streams are netted out, with the Fund receiving or paying, as the
case may be, only the net amount of the two payments. The net amount of the
excess, if any, of the Fund's obligations over its entitlements with respect
to each interest rate swap will be accrued on a daily basis and an amount of
cash or high-quality liquid securities having an aggregate net asset value at
least equal to the accrued excess will be maintained in an account by the
Fund's custodian. If the Fund enters into an interest rate swap on other than
a net basis, the Fund would maintain an account in the full amount accrued on
a daily basis of the Fund's obligations with respect to the swap. To the
extent the Fund sells (i.e., writes) caps and floors, it will maintain in an
account cash or high-quality liquid debt securities having an aggregate net
asset value at least equal to the full amount, accrued on a daily basis, of
the Fund's obligations with respect to any caps or floors. The Fund will not
enter into any interest rate swap, cap or floor transaction unless the
unsecured senior debt or the claims paying ability of the counterparty thereto
is rated at least A by S&P. T. Rowe Price will monitor the creditworthiness
of counterparties on an ongoing basis. If there is a default by the other
parties to such a transaction, the Fund will have contractual remedies
pursuant to the agreements related to the transaction.
The swap market has grown substantially in recent years with a large number of
banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. The Manager has determined that,
as a result, the swap market has become relatively liquid. The Fund may enter
into interest rate swaps only with respect to positions held in its portfolio.
Interest rate swaps do not involve the delivery of securities or other
underlying assets or principal. Accordingly, the risk of loss with respect to
interest rate swaps is limited to the net amount of interest payments that the
Fund is contractually obligated to make. If the other parties to interest
rate swaps default, the Fund's risk of loss consists of the net amount of
interest payments that the Fund is contractually entitled to receive. Since
interest rate swaps are individually negotiated, the Fund expects to achieve
an acceptable degree of correlation between its right to receive interest on
loan interests and its right and obligation to receive and pay interest
pursuant to interest rate swaps.
The aggregate purchase price of caps and floors held by the Fund may not
exceed 10% of the Fund's total assets. The Fund may sell (i.e., write) caps
and floors without limitation, subject to the account coverage requirement
described above.
Futures Contracts (All Funds)
Transactions in Futures. Each Fund may enter into futures contracts (a type of
potentially high risk derivative), including stock index, interest rate and
currency futures ("futures or futures contracts").
Stock index futures contracts may be used to provide a hedge for a portion of
the Fund's portfolio, as a cash management tool, or as an efficient way for
the Manager to implement either an increase or decrease in portfolio market
exposure in response to changing market conditions. The Fund may purchase or
sell futures contracts with respect to any stock index. Nevertheless, to
hedge the Fund's portfolio successfully, the Fund must sell futures contacts
with respect to indices or subindices whose movements will have a significant
correlation with movements in the prices of the Fund's portfolio securities.
Interest rate or currency futures contracts may be used as a hedge against
changes in prevailing levels of interest rates or currency exchange rates in
order to establish more definitely the effective return on securities or
currencies held or intended to be acquired by the Fund. In this regard, the
Fund could sell interest rate or currency futures as an offset against the
effect of expected increases in interest rates or currency exchange rates and
purchase such futures as an offset against the effect of expected declines in
interest rates or currency exchange rates.
The Fund will enter into futures contracts which are traded on national or
foreign futures exchanges, and are standardized as to maturity date and
underlying financial instrument. Futures exchanges and trading in the United
States are regulated under the Commodity Exchange Act by the CFTC. Futures
are traded in London, at the London International Financial Futures Exchange,
in Paris, at the MATIF, and in Tokyo, at the Tokyo Stock Exchange. Although
techniques other than the sale and purchase of futures contracts could be used
for the above-referenced purposes, futures contracts offer an effective and
relatively low cost means of implementing the Fund's objectives in these
areas.
Regulatory Limitations
The Fund will engage in 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 qualify 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 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 and foreign currency options traded on a
commodities exchange will be considered "related options". This policy may be
modified by the Board of Directors/Trustees 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 may have to
apply the above 5% test without excluding the value of initial margin and
premiums paid for bona fide hedging positions.
The Fund's use of futures contracts will not result in leverage. Therefore,
to the extent necessary, in instances involving the purchase of futures
contracts or the writing of call 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 the 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.
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 that Fund.
These subsequent payments, called "variation margin," to and from the futures
broker, are made on a daily basis as the price of the underlying assets
fluctuate making the long and short positions in the futures contract more or
less valuable, a process known as "marking to the market." The Fund expects
to earn interest income on its margin deposits.
Although certain futures contracts, by their terms, require actual future
delivery of and payment for the underlying instruments, in practice most
futures contracts are usually closed out before the delivery date. Closing
out an open futures contract purchase or sale is effected by entering into an
offsetting futures contract sale or purchase, 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 any 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 Treasury Bills 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
Treasury Bills 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.
A futures contract on the Standard & Poor's 500 Stock Index, composed of 500
selected common stocks, most of which are listed on the New York Stock
Exchange, provides an example of how futures contracts operate. The S&P 500
Index assigns relative weightings to the common stocks included in the Index,
and the Index fluctuates with changes in the market values of those common
stocks. In the case of futures contracts on the S&P 500 Index, the contracts
are to buy or sell 500 units. Thus, if the value of the S&P 500 Index were
$150, one contract would be worth $75,000 (500 units x $150). The contract
specifies that no delivery of the actual stocks making up the index will take
place. Instead, settlement in cash occurs. Over the life of the contract,
the gain or loss realized by the Fund will equal the difference between the
purchase (or sale) price of the contract and the price at which the contract
is terminated. For example, if the Fund enters into the example contract
above and the S&P 500 Index is at $154 on the termination date, the Fund will
gain $2,000 (500 units x gain of $4). If, however, the S&P 500 Index is at
$148 on that future date, the Fund will lose $1,000 (500 units x loss of $2).
Special Risks of Transactions in Futures Contracts
Volatility and Leverage. The prices of futures contracts are volatile and are
influenced, among other things, by actual and anticipated changes in the
market and interest rates, which in turn are affected by fiscal and monetary
policies and national and international 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 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 that Fund would realize a loss or a
gain.
Futures contracts may be closed out only on the exchange or board of trade
where the contracts were initially traded. Although the Fund intends to
purchase or sell futures contracts only on exchanges or boards of trade where
there appears to be an active market, there is no assurance that a liquid
market on an exchange or board of trade will exist for any particular contract
at any particular time. In such event, it might not be possible to close a
futures contract, and in the event of adverse price movements, the Fund would
continue to be required to make daily cash payments of variation margin.
However, in the event futures contracts have been used to hedge the underlying
instruments, the Fund would continue to hold the underlying instruments
subject to the hedge until the futures contracts could be terminated. In such
circumstances, an increase in the price of 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. The
Manager 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 the Manager'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 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, the Manager believes that over time the value of
the Fund's portfolio will tend to move in the same direction as the market
indices used to hedge the portfolio. 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 the
Manager might not result in a successful hedging transaction over a very short
time period.
Options on Futures Contracts
Each Fund may purchase and sell options on the same types of futures in which
it may invest.
Options on futures are similar to options on underlying instruments except
that options on futures give the purchaser the right, in return for the
premium paid, to assume a position in a futures contract (a long position if
the option is a call and a short position if the option is a put), rather than
to purchase or sell the futures contract, at a specified exercise price at any
time during the period of the option. Upon exercise of the option, the
delivery of the futures position by the writer of the option to the holder of
the option will be accompanied by the delivery of the accumulated balance in
the writer's futures margin account which represents the amount by which the
market price of the futures contract, at exercise, exceeds (in the case of a
call) or is less than (in the case of a put) the exercise price of the option
on the futures contract. Purchasers of options who fail to exercise their
options prior to the exercise date suffer a loss of the premium paid.
As an alternative to writing or purchasing call and put options on interest
rate futures, the Fund may write or purchase call and put options on financial
indices. Such options would be used in a manner similar to the use of options
on futures contracts. From time to time, a single order to purchase or sell
futures contracts (or options thereon) may be made on behalf of the Fund and
other T. Rowe Price Funds. Such aggregated orders would be allocated among
the Funds 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.
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.
Foreign Futures and Options
Participation in foreign futures and foreign options transactions involves the
execution and clearing of trades on or subject to the rules of a foreign board
of trade. Neither the National Futures Association nor any domestic exchange
regulates activities of any foreign boards of trade, including the execution,
delivery and clearing of transactions, or has the power to compel enforcement
of the rules of a foreign board of trade or any applicable foreign law. This
is true even if the exchange is formally linked to a domestic market so that a
position taken on the market may be liquidated by a transaction on another
market. Moreover, such laws or regulations will vary depending on the foreign
country in which the foreign futures or foreign options transaction occurs.
For these reasons, when the Fund trades foreign futures or foreign options
contracts, it may not be afforded certain of the protective measures provided
by the Commodity Exchange Act, the CFTC's regulations and the rules of the
National Futures Association and any domestic exchange, including the right to
use reparations proceedings before the Commission and arbitration proceedings
provided by the National Futures Association or any domestic futures exchange.
In particular, funds received from the Fund for foreign futures or foreign
options transactions may not be provided the same protections as funds
received in respect of transactions on United States futures exchanges. In
addition, the price of any foreign futures or foreign options contract and,
therefore, the potential profit and loss thereon may be affected by any
variance in the foreign exchange rate between the time the Fund's order is
placed and the time it is liquidated, offset or exercised.
Foreign Currency Transactions
A forward foreign currency exchange contract involves an obligation to
purchase or sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract agreed upon by the parties, at a
price set at the time of the contract. These contracts are principally traded
in the interbank market conducted directly between currency traders (usually
large, commercial banks) and their customers. A forward contract generally
has no deposit requirement, and no commissions are charged at any stage for
trades.
Each Fund may enter into forward contracts for a variety of purposes in
connection with the management of the foreign securities portion of its
portfolio. The Fund's use of such contracts would include, but not be limited
to, the following:
First, when the Fund enters into a contract for the purchase or sale of a
security denominated in a foreign currency, it may desire to "lock in" the
U.S. dollar price of the security. By entering into a forward contract for
the purchase or sale, for a fixed amount of dollars, of the amount of foreign
currency involved in the underlying security transactions, the Fund will be
able to protect itself against a possible loss resulting from an adverse
change in the relationship between the U.S. dollar and the subject foreign
currency during the period between the date the security is purchased or sold
and the date on which payment is made or received.
Second, when the Manager believes that one currency may experience a
substantial movement against another currency, including the U.S. dollar, it
may enter into a forward contract to sell or buy the amount of the former
foreign currency, approximating the value of some or all of the Fund's
portfolio securities denominated in such foreign currency. Alternatively,
where appropriate, the Fund may hedge all or part of its foreign currency
exposure through the use of a basket of currencies or a proxy currency where
such currency or currencies act as an effective proxy for other currencies.
In such a case, the Fund may enter into a forward contract where the amount of
the foreign currency to be sold exceeds the value of the securities
denominated in such currency. The use of this basket hedging technique may be
more efficient and economical than entering into separate forward contracts
for each currency held in the Fund. The precise matching of the forward
contract amounts and the value of the securities involved will not generally
be possible since the future value of such securities in foreign currencies
will change as a consequence of market movements in the value of those
securities between the date the forward contract is entered into and the date
it matures. The projection of short-term currency market movement is
extremely difficult, and the successful execution of a short-term hedging
strategy is highly uncertain. Under normal circumstances, consideration of
the prospect for currency parities will be incorporated into the longer term
investment decisions made with regard to overall diversification strategies.
However, the Manager believes that it is important to have the flexibility to
enter into such forward contracts when it determines that the best interests
of the Fund will be served. Third, the Fund may use forward contracts when
the Fund wishes to hedge out of the dollar into a foreign currency in order to
create a synthetic bond or money market instrument-the security would be
issued in U.S. dollrs but the dollar component would be transformed into a
foreign currency through a forward contract.
The Fund may enter into forward contacts for any other purpose consistent with
that Fund's investment objective and program. However, the Fund will not
enter into a forward contract, or maintain exposure to any such contract(s),
if the amount of foreign currency required to be delivered thereunder would
exceed the Fund's holdings of liquid, high-grade debt securities and currency
available for cover of the forward contract(s). In determining the amount to
be delivered under a contract, the Fund may net offsetting positions.
At the maturity of a forward contract, the Fund may sell the portfolio
security and make delivery of the foreign currency, or it may retain the
security and either extend the maturity of the forward contract (by "rolling"
that contract forward) or may initiate a new forward contract.
If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss (as described below) to the
extent that there has been movement in forward contract prices. If the Fund
engages in an offsetting transaction, it may subsequently enter into a new
forward contract to sell the foreign currency. Should forward prices decline
during the period between the Fund's entering into a forward contract for the
sale of a foreign currency and the date it enters into an offsetting contract
for the purchase of the foreign currency, the Fund will realize a gain to the
extent the price of the currency it has agreed to sell exceeds the price of
the currency it has agreed to purchase. Should forward prices increase, the
Fund will suffer a loss to the extent of the price of the currency it has
agreed to purchase exceeds the price of the currency it has agreed to sell.
The Fund's dealing in forward foreign currency exchange contracts will
generally be limited to the transactions described above. However, the Fund
reserves the right to enter into forward foreign currency contracts for
different purposes and under different circumstances. Of course, the Fund is
not required to enter into forward contracts with regard to its foreign
currency-denominated securities and will not do so unless deemed appropriate
by the Manager. It also should be realized that this method of hedging
against a decline in the value of a currency does not eliminate fluctuations
in the underlying prices of the securities. It simply establishes a rate of
exchange at a future date. Additionally, although such contracts tend to
minimize the risk of loss due to a decline in the value of the hedged
currency, at the same time, they tend to limit any potential gain which might
result from an increase in the value of that currency.
Although the Fund values its assets daily in terms of U.S. dollars, it does
not intend to convert its holdings of foreign currencies into U.S. dollars on
a daily basis. It will do so from time to time, and investors should be aware
of the costs of currency conversion. Although foreign exchange dealers do not
charge a fee for conversion, they do realize a profit based on the difference
(the "spread") between the prices at which they are buying and selling various
currencies. Thus, a dealer may offer to sell a foreign currency to the Fund
at one rate, while offering a lesser rate of exchange should the Fund desire
to resell that currency to the dealer.
Federal Tax Treatment of Options, Futures Contracts and Forward Foreign
Exchange Contracts
Each Fund may enter into certain option, futures, and forward foreign exchange
contracts, including options and futures on currencies, which will be treated
as Section 1256 contracts or straddles.
Transactions which are considered Section 1256 contracts will be considered to
have been closed at the end of the Fund's fiscal year and any gains or losses
will be recognized for tax purposes at that time. Such gains or losses from
the normal closing or settlement of such transactions will be characterized as
60% long-term capital gain or loss and 40% short-term capital gain or loss
regardless of the holding period of the instrument. The Fund will be required
to distribute net gains on such transactions to shareholders even though it
may not have closed the transaction and received cash to pay such
distributions.
Options, futures and forward foreign exchange contracts, including options and
futures on currencies, which offset a foreign dollar denominated bond or
currency position may be considered straddles for tax purposes, in which case
a loss on any position in a straddle will be subject to deferral to the extent
of unrealized gain in an offsetting position. The holding period of the
securities or currencies comprising the straddle will be deemed not to begin
until the straddle is terminated. For securities offsetting a purchased put,
this adjustment of the holding period may increase the gain from sales of
securities held less than three months. The holding period of the security
offsetting an "in-the-money qualified covered call" option on an equity
security will not include the period of time the option is outstanding.
Losses on written covered calls and purchased puts on securities, excluding
certain "qualified covered call" options on equity securities, may be
long-term capital loss, if the security covering the option was held for more
than twelve months prior to the writing of the option.
In order for the Fund to continue to qualify for federal income tax treatment
as a regulated investment company, at least 90% of its gross income for a
taxable year must be derived from qualifying income; i.e., dividends,
interest, income derived from loans of securities, and gains from the sale of
securities or currencies. Pending tax regulations could limit the extent that
net gain realized from option, futures or foreign forward exchange contracts
on currencies is qualifying income for purposes of the 90% requirement. In
addition, gains realized on the sale or other disposition of securities,
including option, futures or foreign forward exchange contracts on securities
or securities indexes and, in some cases, currencies, held for less than three
months, must be limited to less than 30% of the Fund's annual gross income.
In order to avoid realizing excessive gains on securities or currencies held
less than three months, the Fund may be required to defer the closing out of
option, futures or foreign forward exchange contracts beyond the time when it
would otherwise be advantageous to do so. It is anticipated that unrealized
gains on Section 1256 option, futures and foreign forward exchange contracts,
which have been open for less than three months as of the end of the Fund's
fiscal year and which are recognized for tax purposes, will not be considered
gains on securities or currencies held less than three months for purposes of
the 30% test.
___________________________________________________________________________
INVESTMENT
RESTRICTIONS
Fundamental policies may not be changed without the approval of the lesser of
(1) 67% of each 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 each Fund's outstanding shares. Other
restrictions in the form of operating policies are subject to change by the
Fund's Board of Directors without shareholder approval.
Any investment restriction which involves a maximum percentage of securities
or assets shall not be considered to be violated unless an excess over the
percentage occurs immediately after, and is caused by, an acquisition of
securities or assets of, or borrowings by, the Fund.
Fundamental Policies
As a matter of fundamental policy, each Fund 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 331/3% 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 Fund
may enter into futures contracts and options thereon;
(3) 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;
(4) 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 331/3% of the value of the Fund's total assets;
(ii) purchase money market securities and enter into repurchase
agreements; and (iii) acquire publicly-distributed or privately-placed
debt securities and purchase debt;
(5) 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;
(6) 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);
(7) Real Estate. Purchase or sell real estate unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent
the Fund from investing in securities or other instruments backed by
real estate or securities of companies engaged in the real estate
business);
(8) Senior Securities. Issue senior securities except in compliance with the
Investment Company Act of 1940; or
(9) 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.
NOTES
The following Notes should be read in connection with the above-described
fundamental policies. The Notes are not fundamental policies.
With respect to investment restrictions (1) and (4) the Fund will not borrow
from or lend to any other T. Rowe Price Fund unless each Fund applies for and
receives 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 Fund or promulgate any rules allowing the transactions.
With respect to investment restriction (2), the Fund does not consider
currency contracts or hybrid instruments to be commodities.
For purposes of investment restriction (3), U.S., state or local governments,
or related agencies or instrumentalities, are not considered an industry.
Industries are determined by reference to the classifications of industries
set forth in the Fund's Semi-Annual and Annual Reports.
For purposes of investment restriction (4), the Fund will consider the
acquisition of a debt security to include the execution of a note or other
evidence of an extension of credit with a term of more than nine months.
For purposes of investment restriction (5), the Fund will consider a
repurchase agreement fully collateralized with U.S. government securities to
be U.S. government securities.
Operating Policies
As a matter of operating policy, the Fund may not:
(1) Borrowing.
(a) The Fund will not purchase additional securities when money
borrowed exceeds 5% of its total assets.
(b) No Fund may borrow more than: (1) 10% of net asset value of the
Fund when borrowing for any general purpose, and (2) 25% of net
asset value when borrowing as a temporary measure to facilitate
redemptions. Net asset value of a portfolio is the market value
of all investments or assets owned less outstanding liabilities of
the portfolio at the time that any new or additional borrowing is
undertaken.
Net asset value of a portfolio is the market value of all
investments or assets owned less outstanding liabilities of the
portfolio at the time that any new or additional borrowing is
undertaken.
(2) Control of Portfolio Companies. Invest in companies for the purpose of
exercising management or control;
(3) Equity Securities.
(a) Limited-Term Bond Portfolio: Purchase any common stocks or other
equity securities;
(b) Personal Strategy Balanced Portfolio: Purchase any common stocks
or other equity securities, except as set forth in its prospectus
and operating policy on investment companies;
(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.
(a) Equity Income, New America Growth, Personal Strategy Balanced and
International Stock Portfolios: Purchase illiquid securities and
securities of unseasoned issuers if, as a result, more than 15% of
the Fund's 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% limitation;
(b) Limited-Term Bond Portfolio: Purchase illiquid securities and
securities of unseasoned issuers if, as a result, more than 15% of
its net assets would be invested in such securities.
(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. Duplicate fees may result from
such purchases;
(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 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 331/3% of the Fund's total assets at the time of borrowing or
investment;
(9) Oil and Gas Programs. Purchase participations or other direct interests
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 0.5% 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
(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 Fund in units or attached to securities may be deemed to
be without value.
All Funds
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 that 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 that
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.
International Stock Portfolio
In addition to the restrictions described above, some foreign countries limit,
or prohibit, all direct foreign investment in the securities of their
companies. However, the governments of some countries have authorized the
organization of investment funds to permit indirect foreign investment in such
securities. For tax purposes these funds may be known as Passive Foreign
Investment Companies. The Fund is subject to certain percentage limitations
under the 1940 Act and certain states relating to the purchase of securities
of investment companies, and may be subject to the limitation that no more
than 10% of the value of the Fund's total assets may be invested in such
securities.
__________________________________________________________________________
YIELD INFORMATION
Limited-Term Bond Portfolio
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 regulation 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
reimbursement 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. 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 the Fund calculated under the above-described method for the
month ended March 31, 1995 was 6.84%.
___________________________________________________________________________
INVESTMENT
PERFORMANCE
Limited-Term Bond, Equity Income, New America Growth and International Stock
Funds 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. 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
12/31/94 12/31/94
________________________________________________________________________
Limited-Term Bond Portfolio N/A 2.62%
________________________________________________________________________
Merrill Lynch 1-5 Year Corporate
and Government Bond Index -0.55% 1.57
________________________________________________________________________
Lipper Short Investment Grade
Debt Funds Average -0.37 0.87*
________________________________________________________________________
Equity Income Portfolio N/A 7.15
________________________________________________________________________
Lipper Equity Income Fund Average -2.54 1.29
________________________________________________________________________
S&P 500 1.32 5.34
________________________________________________________________________
New America Growth Portfolio N/A 1.00
________________________________________________________________________
Lipper Growth Fund Index -1.77 1.66
________________________________________________________________________
S&P 500 1.32 5.34
________________________________________________________________________
International Stock Portfolio N/A 1.80
________________________________________________________________________
Dow Jones Industrial Average - 7.69
________________________________________________________________________
Lipper International Funds Average - 0.10
________________________________________________________________________
EAFE Index - 4.35
________________________________________________________________________
CPI - 1.97
________________________________________________________________________
* From May 31, 1994.
Price-Fleming believes that foreign economies have performed well, and
emerging economies are significantly better than the world average, as shown
in the chart below.
________________________________________________________________________
GDP Growth Rates
________________________________________________________________________
Average
1975-84 1985 1986 1987 1988 1989 1990 1991 1992
________________________________________________________________________
World 3.3 3.8 3.6 3.9 4.6 3.3 2.0 0.6 1.8
________________________________________________________________________
Industrialized 2.5 3.3 2.8 3.2 4.3 3.2 2.1 0.2 1.5
________________________________________________________________________
Developing (Asia) 6.3 7.2 7.1 8.1 9.1 5.5 5.7 5.8 7.9
________________________________________________________________________
Source: World Economic Outlook, IMF, May 1993
Outside Sources of Information
From time to time, in reports and promotional literature: (1) the Fund's total
return performance or P/E ratio may be compared to any one or combination of
the following: (i) the Standard & Poor's 500 Stock Index and Dow Jones
Industrial Average so that you may compare the Fund's results with those of a
group of unmanaged securities widely regarded by investors as representative
of the U.S. stock market in general; (ii) other groups of mutual funds,
including T. Rowe Price Funds, tracked by: (A) Lipper Analytical Services, a
widely used independent research firm which ranks mutual funds by overall
performance, investment objectives, and assets; (B) Morningstar, Inc., another
widely used independent research firm which ranks mutual funds; or (C) other
financial or business publications, such as Business Week, Money Magazine,
Forbes and Barron's, which provide similar information; (iii) The Financial
Times (a London based international financial newspaper)-Actuaries World
Indices, including Europe and sub indices comprising this Index (a wide range
of comprehensive measures of stock price performance for the major stock
markets as well as for regional areas, broad economic sectors and industry
groups); (iv) Morgan Stanley Capital International Indices, including the EAFE
Index, Pacific Basin Index, Japan Index, U.K. Index, and Pacific Ex Japan
Index which is a widely-recognized series of indices in international market
performance; (v) Hoarve Govette Small Cap Index and Datastream, as sources for
United Kingdom Small Cap Stocks; (vi) the International Finance Corporation
(an affiliate of the World Bank established to encourage economic development
in less developed countries), World Bank, OECD (Organization for Economic
Co-Operation and Development) and IMF (International Monetary Fund) as a
source of economic statistics; (vii) the Nikkei Average, a generally accepted
benchmark for performance of the Japanese stock market; (viii) indices of
stocks comparable to those in which the Fund invests including the Topix Idex,
which reflects the performance of the first section of the Tokyo Stock
Exchange and the Japan Small-Tokyo Stock Exchange Section 2; (ix) the Wilshire
Small Growth Index, as a source for U.S. small company average annual returns;
(x) IFCI Composite 100, IFCI Latin America 100, IFCI Asia 100, and the IFCI
Europe/Mideast 100 may each be used as a source to represent total return on
an investment of $100 in each index at various points in time; and (xi) the
performance of U.S. government and corporate bonds, notes and bills. (The
purpose of these comparisons would be to illustrate historical trends in
different market sectors so as to allow potential investors to compare
different investment strategies.); (2) the Consumer Price Index (measure for
inflation) may be used to assess the real rate of return from an investment in
the Fund; (3) other U.S. or foreign government statistics such as GNP, and net
import and export figures derived from governmental publications, e.g. The
Survey of Current Business, may be used to illustrate investment attributes of
the Fund or the general economic, business, investment, or financial
environment in which the Fund operates; (4) the effect of tax-deferred
compounding on the Fund's investment returns, or on returns in general, may be
illustrated by graphs, charts, etc. where such graphs or charts would compare,
at various points in time, the return from an investment in the Fund (or
returns in general) on a tax-deferred basis (assuming reinvestment of capital
gains and dividends and assuming one or more tax rates) with the return on a
taxable basis; and (5) the sectors or industries in which the Fund invests may
be compared to relevant indices or surveys (e.g. S&P Industry Surveys) in
order to evaluate the Fund's historical performance or current or potential
value with respect to the particular industry or sector.
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 investing money
for retirement, saving for a down payment on a home, or paying college costs.
To explain how the Fund could be used to assist investors in planning for
these goals and to illustrate basic principles of investing, various
worksheets and guides prepared by T. Rowe Price Associates, Inc. and/or T.
Rowe Price Investment Services, Inc. may be made available. These currently
include: the Asset Mix Worksheet which is designed to show shareholders how to
reduce their investment risk by developing a diversified investment plan: the
College Planning Guide which discusses various aspects of financial planning
to meet college expenses and assists parents in projecting the costs of a
college education for their children; the Retirement Planning Kit (also
available in a PC version) which includes a detailed workbook to determine how
much money you may need for retirement and suggests how you might invest to
reach your goal; and the Retirees Financial Guide which includes a detailed
workbook to determine how much money you can afford to spend and still
preserve your purchasing power and suggest how you might invest to reach your
goal. From time to time, other worksheets and guides may be made available as
well. Of course, an investment in the Fund cannot guarantee that such goals
will be met. Personal Strategy Planner simplifies investment decision making
by helping investors define personal financial goals, establish length of time
the investor intends to invest, determine risk "comfort zone" and select
diversified investment mix.
To assist investors in understanding the different returns and risk
characteristics of various investments, the aforementioned guides will include
presentation of historical returns of various investments using published
indices. An example of this is shown below.
________________________________________________________________________
Historical Returns for Different Investments
________________________________________________________________________
Annualized returns for
periods ended 12/31/94 50 years 20 years 10 years 5 years
________________________________________________________________________
Small-Company Stocks 14.4% 20.3% 11.1% 11.8%
________________________________________________________________________
Large-Company Stocks 11.9 14.6 14.4 8.7
________________________________________________________________________
Foreign Stocks N/A 16.3 17.9 1.8
________________________________________________________________________
Long-Term Corporate Bonds 5.3 10.0 11.6 8.4
________________________________________________________________________
Intermediate-Term U.S. Gov't. Bonds5.6 9.3 9.4 7.5
________________________________________________________________________
Treasury Bills 4.7 7.3 5.8 4.7
________________________________________________________________________
U.S. Inflation 4.5 5.5 3.6 3.5
________________________________________________________________________
Sources: Ibbotson Associates, Morgan Stanley. Foreign stocks reflect
performance of The Morgan Stanley Capital International EAFE Index, which
includes some 1,000 companies representing the stock markets of Europe,
Australia, New Zealand, and the Far East. This chart is for illustrative
purposes only and should not be considered as performance for, or the
annualized return of, any T. Rowe Price Fund. Past performance does not
guarantee future results.
Also included will be various portfolios demonstrating how these historical
indices would have performed in various combinations over a specified time
period in terms of return. An example of this is shown below.
________________________________________________________________________
Performance of Retirement Portfolios*
Average
Annualized
Returns
Asset 20 Years
Mix Ended 12/31/94
__________ ________________ Value
of
$10,000
Investment
Normal Real Best Worst After
Portfolio Growth Income Safety Return Return** Year Year Period
__________________________________________________________________________
I. Low
Risk 40% 40% 20% 12.4% 6.9% 24.9% 0.1% $92,515
__________________________________________________________________________
II. Moderate
Risk 60% 30% 10% 13.5% 8.1% 29.1% -1.8% $118,217
__________________________________________________________________________
III. High
Risk 80% 20% 0% 14.5% 9.1% 33.4% -5.2% $149,200
__________________________________________________________________________
Source: T. Rowe Price Associates; data supplied by Lehman Brothers, Wilshire
Associates, and Ibbotson Associates.
* Based on actual performance for the 20 years ended 1994
of stocks (85% Wilshire 5000 and 15% Europe, Australia,
Far East [EAFE] Index), bonds (Lehman Brothers Aggregate
Bond Index from 1976-93, Lehman Brothers Government/Corporate
Bond Index from 1976-94, and Lehman Brothers Government/Corporate
Bond Index from 1975), and 30-day Treasury bills from January 1975
through December 1994. Past performance does not guarantee future
results. Figures include changes in principal value and reinvested
dividends and assume the same asset mix is maintained each year.
This exhibit is for illustrative purposes only and is not representative
of the performance of any T. Rowe Price fund.
** Based on inflation rate of 5.5% for the 20-year period ended 12/31/94.
Outside Sources of Information
From time to time, in reports and promotional literature, one or more of the
T. Rowe Price funds, including these Funds, may compare its performance to
Overnight Government Repurchase Agreements, Treasury bills, notes, and bonds,
certificates of deposit, and six-month money market certificates. Performance
may also be compared to (1) indices of broad groups of managed or 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:
Advertising News Service, Inc., "Bank Rate Monitor+ - The Weekly Financial
Rate Reporter" is a weekly publication which lists the yields on various
money market instruments offered to the public by 100 leading banks and
thrift institutions in the U.S., including loan rates offered by these
banks. 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.
Donoghue Organization, Inc., "Donoghue's Money Fund Report" is a weekly
publication which tracks net assets, yield, maturity and portfolio holdings
on approximately 380 money market mutual funds offered in the U.S. These
funds are broken down into various categories such as U.S. Treasury,
Domestic Prime and Euros, Domestic Prime and Euros and Yankees, and
Aggressive.
First Boston High Yield Index, It shows statistics on the Composite Index
and analytical data on new issues in the marketplace and low-grade issuers.
Lipper Analytical Services, Inc., "Lipper-Fixed Income Fund Performance
Analysis" is a monthly publication which tracks net assets, total return,
principal return and yield on approximately 950 fixed income mutual funds
offered in the U.S.
Merrill Lynch, Pierce, Fenner & Smith, Inc., "Taxable Bond Indices" is a
monthly publication which lists principal, coupon and total return on over
100 different taxable bond indices tracked by Merrill Lynch, together with
the par weighted characteristics of each Index.
Morningstar, Inc., is a widely used independent research firm which rates
mutual funds by overall performance, investment objectives and assets.
Salomon Brothers Inc., "Analytical Record of Yields and Yield Spreads" is a
publication which tracks historical yields and yield spreads on short-term
market rates, public obligations of the U.S. Treasury and agencies of the
U.S. government, public corporate debt obligations, municipal debt
obligations and preferred stocks.
Salomon Brothers Inc., "Bond Market Round-up" is a weekly publication which
tracks the yields and yield spreads on a large, but select, group of money
market instruments, public corporate debt obligations, and public
obligations of the U.S. Treasury and agencies of the U.S. Government.
Salomon Brothers Inc., "High Yield Composite Index" is an index which
provides performance and statistics for the high yield market place.
Salomon Brothers Inc., "Market Performance" is a monthly publication which
tracks principal return, total return and yield on the Salomon Brothers
Broad investment - Grade Bond Index and the components of the Index.
Shearson Lehman Brothers, Inc., "The Bond Market Report" is a monthly
publication which tracks principal, coupon and total return on the Shearson
Lehman Govt./Corp. Index and Shearson Lehman Aggregate Bond Index, as well
as all the components of these Indices.
Telerate Systems, Inc., is a market data distribution network which tracks
a broad range of financial markets including, the daily rates on money
market instruments, public corporate debt obligations and public
obligations of the U.S. Treasury and agencies of the U.S. Government.
Wall Street Journal, is a national daily financial news publication which
lists the yields and current market values on money market instruments,
public corporate debt obligations, public obligations of the U.S.
Treasury and agencies of the U.S. government as well as common stocks,
preferred stocks, convertible preferred stocks, options and commodities; in
addition to indices prepared by the research departments of such financial
organizations as Shearson Lehman/American Express Inc., and Merrill Lynch,
Pierce, Fenner and Smith, Inc., including information provided by the
Federal Reserve Board.
Performance rankings and ratings reported periodically in national
financial publications such as MONEY, FORBES, BUSINESS WEEK, BARRON'S, etc.
will also be used.
Insights
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.
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 of any Fund were to receive an in kind
redemption of portfolio securities of the Fund, brokerage fees could be
incurred by the shareholder in 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 objective and policies of the Fund; (b) are acquired for investment
and not for resale except in accordance with applicable law; (c) have a value
that is readily ascertainable via listing on or trading in a recognized U.S.
or international exchange or market; and (d) are not illiquid.
__________________________________________________________________________
MANAGEMENT OF FUND
The officers and directors of each Fund are listed below. Unless otherwise
noted, the address of each is 100 East Pratt Street, Baltimore, Maryland
21202. Except as indicated, each has been an employee of the Manager for more
than five years. In the list below, each Fund's directors who are considered
"interested persons" of the Manager 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 the Manager.
__________________________________________________________________________
OFFICERS (ALL FUNDS)
HENRY H. HOPKINS, Vice President - Managing Director, T. Rowe Price; Vice
President and Director, T. Rowe Price Investment Services, Inc., T. Rowe Price
Services, Inc., and T. Rowe Price Trust Company; Vice President, Rowe
Price-Fleming International, Inc. and T. Rowe Price Retirement Plan Services,
Inc.
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, T. Rowe Price
and Rowe Price-Fleming International, Inc.
EDWARD T. SCHNEIDER, Assistant Vice President - Assistant Vice President, T.
Rowe Price, and Vice President, T. Rowe Price Services, Inc.
INGRID I. VORDEMBERGE, Assistant Vice President - Employee, T. Rowe Price
__________________________________________________________________________
INDEPENDENT DIRECTORS
Equity Income, New America Growth and Personal Strategy Balanced Portfolios
LEO C. BAILEY, Director - Retired; Address: 3396 South Placita Fabula, Green
Valley, Arizona 85614
DONALD W. DICK, JR., Director - Principal, Overseas Partners, Inc., a
financial investment firm; formerly (6/65-3/89) Director and Vice
President-Consumer Products Division, McCormick & Company, Inc., international
food processors; Director, Waverly, Inc., Baltimore, Maryland; Address: 111
Pavonia Avenue, Suite 334, Jersey City, New Jersey 07310
DAVID K. FAGIN, Director - Chairman, Chief Executive Officer and Director,
Golden Star Resources, Ltd.; formerly (1986-7/91) President, Chief Operating
Officer and Director, Homestake Mining Company; Address: One Norwest Center,
1700 Lincoln Street, Suite 1950, Denver, Colorado 80203
ADDISON LANIER, Director - Financial management; Manager, Thomas Emery's Sons,
LLC, Alternative Asset Holdings, LLC, President, Emery Group, Inc.; Director,
Scinet Development and Holdings, Inc.; Address: 441 Vine Street, #2300,
Cincinnati, Ohio 45202-2913
JOHN K. MAJOR, Director - Chairman of the Board and President, KCMA
Incorporated, Tulsa, Oklahoma; Address: 126 E. 26 Place, Tulsa, Oklahoma
74114-2422
HUBERT D. VOS, Director - President, Stonington Capital Corporation, a private
investment company; Address: 1114 State Street, Suite 247, Santa Barbara,
California 93190-0409
PAUL M. WYTHES, Director - Founding General Partner, Sutter Hill Ventures, a
venture capital limited partnership, providing equity capital to young high
technology companies throughout the United States; Director, Teltone
Corporation, Interventional Technologies Inc. and Stuart Medical, Inc.;
Address: 755 Page Mill Road, Suite A200, Palo Alto, California 94304
Limited-Term Bond Portfolio
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
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) President, EA Engineering, Inc.,
Baltimore, Maryland; Address: The Legg Mason Tower, 111 South Calvert Street,
Suite 2700, Baltimore, Maryland 21202
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, Old Dominion University; Member, Virginia
State Bar and American Bar Association; James River Corporation and Wilderness
Conservancy At Mountain Lake, Inc.; Address: One James Center, 901 East Cary
Street, Richmond, Virginia 23219-4030
International Stock Portfolio
LEO C. BAILEY, Director - Retired; Address: 3396 South Placita Fabula, Green
Valley, Arizona 85614
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
DONALD W. DICK, JR., Director - Principal, Overseas Partners, Inc., a
financial investment firm; formerly (6/65-3/89) Director and Vice
President-Consumer Products Division, McCormick & Company, Inc., international
food processors; Director, Waverly Inc., Baltimore, Maryland; Address: 111
Pavonia Avenue, Suite 334, Jersey City, New Jersey 07310
ADDISON LANIER, Director - Financial management; Manager, Thomas Emery's Sons,
LLC, Alternative Asset Holdings, LLC, President, Emery Group, Inc.; Director,
Scinet Development and Holdings, Inc.; Address: 441 Vine Street, #2300,
Cincinnati, Ohio 45202-2913
Limited-Term Bond Portfolio
*GEORGE J. COLLINS, President and Director - President, Managing Director and
Chief Executive Officer, T. Rowe Price; Director, Rowe Price-Fleming
International, Inc., T. Rowe Price Trust Company and T. Rowe Price Retirement
Plan Services, Inc., Chartered Investment Counselor
*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.
EDWARD A. WIESE, President - Vice President, T. Rowe Price, Rowe Price-Fleming
International, Inc. and T. Rowe Price Trust Company
ROBERT P. CAMPBELL, Vice President - Vice President, T. Rowe Price and Rowe
Price-Fleming International, Inc.; formerly (4/80-5/90) Vice President and
Director, Private Finance, New York Life Insurance Company, New York, New York
CHRISTY M. DIPIETRO, Vice President - Vice President, T. Rowe Price and T.
Rowe Price Trust Company
JAMES M. MCDONALD, Vice President - Vice President, T. Rowe Price
ROBERT M. RUBINO, Vice President - Vice President, T. Rowe Price
THOMAS E. TEWKSBURY, Vice President - Vice President, T. Rowe Price
CHERYL A. REDWOOD, Assistant Vice President - Employee, T. Rowe Price
Equity Income, New America Growth and Personal Strategy Balanced Portfolios
*JOHN H. LAPORTE, JR., Executive Vice President and Director - Managing
Director, T. Rowe Price; Chartered Financial Analyst
*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.
*M. DAVID TESTA, President and Director - Chairman of the Board, Rowe
Price-Fleming International, Inc.; Managing Director, T. Rowe Price; Vice
President and Director, T. Rowe Price Trust Company; Chartered Financial
Analyst; Chartered Investment Counselor
BRIAN W. H. BERGHUIS, Executive Vice President - Vice President, T. Rowe Price
BRIAN C. ROGERS, Executive Vice President - Managing Director, T. Rowe Price
THOMAS H. BROADUS, JR., Vice President - Managing Director, T. Rowe Price;
Chartered Financial Analyst and Chartered Investment Counselor
ANDREW M. BROOKS, Vice President - Vice President, T. Rowe Price
GREGORY V. DONOVAN, Vice President - Vice President, T. Rowe Price
RICHARD P. HOWARD, Vice President - Vice President, T. Rowe Price; Chartered
Financial Analyst
JAMES A. C. KENNEDY, III, Vice President - Managing Director, T. Rowe Price
ROBERT W. SMITH, Vice President - Vice President, T. Rowe Price; formerly
(1987-1992) Investment Analyst, Massachusetts Financial Services, Inc.,
Boston, Massachusetts
WILLIAM J. STROMBERG, Vice President - Vice President, T. Rowe Price
MARK J. VASELKIV, Vice President - Vice President, T. Rowe Price
JOHN F. WAKEMAN, Vice President - Vice President, T. Rowe Price
International Stock Portfolio
*M. DAVID TESTA, Chairman of the Board - Chairman of the Board, Rowe
Price-Fleming International, Inc.; Managing Director, T. Rowe Price; Vice
President and Director, T. Rowe Price Trust Company; Chartered Financial
Analyst; Chartered Investment Counselor
*MARTIN G. WADE, President and Director - President, Rowe Price-Fleming
International, Inc.; Director, Robert Fleming Holdings Limited; Address: 25
Copthall Avenue, London, EC2R 7DR, England
CHRISTOPHER D. ALDERSON, Vice President - Vice President, Rowe Price-Fleming
International, Inc.
PETER B. ASKEW, Vice President - Executive Vice President, Rowe Price-Fleming
International, Inc.
RICHARD J. BRUCE, Vice President - Vice President of Rowe Price-Fleming
International, Inc.; formerly (1985-1990) Investment Manager, Jardine Fleming
Investment Advisers, Tokyo
ROBERT P. CAMPBELL, Vice President - Vice President, T. Rowe Price and Rowe
Price-Fleming International Inc.; formerly (4/80-5/90) Vice President and
Director, Private Finance, New York Life Insurance Company, New York, New York
MARK J. T. EDWARDS, Vice President - Vice President, Rowe Price-Fleming
International, Inc.
JOHN R. FORD, Vice President - Executive Vice President, Rowe Price-Fleming
International, Inc.
ROBERT C. HOWE, Vice President - Vice President, Rowe Price-Fleming
International, Inc. and T. Rowe Price
STEPHEN ILOTT, Vice President - Employee, Rowe Price-Fleming International,
Inc.; formerly (1988-1991) portfolio management, Fixed Income Portfolios
Group, Robert Fleming Holdings Limited, London
GEORGE A. MURNAGHAN, Vice President - Vice President, Rowe Price-Fleming
International, Inc., T. Rowe Price, T. Rowe Price Trust Company and T. Rowe
Price Investment Services, Inc.
JAMES S. RIEPE, Vice President - 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.
CHRISTOPHER ROTHERY, Vice President - Vice President, Rowe Price-Fleming
International, Inc.; formerly (1987-1989) employee of Robert Fleming Holdings
Limited, London
JAMES B. M. SEDDON, Vice President - Vice President, Rowe Price-Fleming
International, Inc.
BENEDICT R. F. THOMAS, Vice President - Vice President, Rowe Price-Fleming
International, Inc.
DAVID J. L. WARREN, Vice President - Executive Vice President, Rowe
Price-Fleming International, Inc.
WILLIAM F. WENDLER, II, Vice President - Vice President, Rowe Price-Fleming
International, Inc., T. Rowe Price and T. Rowe Price Investment Services, Inc.
EDWARD A. WIESE, Vice President - Vice President, T. Rowe Price, Rowe
Price-Fleming International, Inc. and T. Rowe Price Trust Company
ANN B. CRANMER, Assistant Vice President - Vice President, Rowe Price-Fleming
International, Inc.
LEAH P. HOLMES, Assistant Vice President - Vice President, Rowe Price-Fleming
International, Inc. and Assistant Vice President, T. Rowe Price
Each Fund's Executive Committee, consisting of the Funds' interested
directors/trustees, has been authorized by its respective Board of
Directors/Trustees to exercise all powers of the Board to manage the Fund in
the intervals between meetings of the Board, except the powers prohibited by
statute from being delegated.
__________________________________________________________________________
COMPENSATION TABLE
Total
Pension Compensation
or from
Retirement Fund and
Aggregate Benefits Fund Complex
Compensation Accrued Paid to
from as Part Directors/
Name of Person, Position Fund(a) of Fund(b) Trustees(c)
________________________________________________________________________
Equity Income Portfolio
________________________________________________________________________
Leo C. Bailey, Director $630 N/A $64,583
________________________________________________________________________
Donald W. Dick, Jr., Director 630 N/A 64,833
________________________________________________________________________
David K. Fagin, Director 630 N/A 53,833
________________________________________________________________________
Addison Lanier, Director 630 N/A 64,583
________________________________________________________________________
John K. Major, Director 630 N/A 54,583
________________________________________________________________________
Hanne M. Merriman, Director 630 N/A 42,083
________________________________________________________________________
Hubert D. Vos, Director 630 N/A 54,583
________________________________________________________________________
Paul M. Wythes, Director 630 N/A 54,333
________________________________________________________________________
John H. Laporte, Director(b) - N/A -
________________________________________________________________________
James S. Riepe, Director(b) - N/A -
________________________________________________________________________
M. David Testa, Director(b) - N/A -
________________________________________________________________________
New America Growth Portfolio
________________________________________________________________________
Leo C. Bailey, Director $631 N/A $64,583
________________________________________________________________________
Donald W. Dick, Jr., Director 631 N/A 64,833
________________________________________________________________________
David K. Fagin, Director 631 N/A 53,83
________________________________________________________________________
Addison Lanier, Director 631 N/A 64,583
________________________________________________________________________
John K. Major, Director 631 N/A 54,583
________________________________________________________________________
Hanne M. Merriman, Director 631 N/A 42,083
________________________________________________________________________
Hubert D. Vos, Director 631 N/A 54,583
________________________________________________________________________
Paul M. Wythes, Director 631 N/A 54,333
________________________________________________________________________
John H. Laporte, Director(b) - N/A -
________________________________________________________________________
James S. Riepe, Director(b) - N/A -
________________________________________________________________________
M. David Testa, Director(b) - N/A -
________________________________________________________________________
___________________________________________________________________________
COMPENSATION TABLE
(CONTINUED)
Total
Pension Compensation
or from
Retirement Fund and
Aggregate Benefits Fund Complex
Compensation Accrued Paid to
from as Part Directors/
Name of Person, Position Fund(a) of Fund(b) Trustees(c)
________________________________________________________________________
Personal Strategy Balanced Portfolio
________________________________________________________________________
Leo C. Bailey, Director $630 N/A $64,583
________________________________________________________________________
Donald W. Dick, Jr., Director 630 N/A 64,833
________________________________________________________________________
David K. Fagin, Director 630 N/A 53,833
________________________________________________________________________
Addison Lanier, Director 630 N/A 64,583
________________________________________________________________________
John K. Major, Director 630 N/A 54,583
________________________________________________________________________
Hanne M. Merriman, Director 630 N/A 42,083
________________________________________________________________________
Hubert D. Vos, Director 630 N/A 54,583
________________________________________________________________________
Paul M. Wythes, Director 630 N/A 54,333
________________________________________________________________________
John H. Laporte, Director(b) - N/A -
________________________________________________________________________
James S. Riepe, Director(b) - N/A -
________________________________________________________________________
M. David Testa, Director(b) - N/A -
________________________________________________________________________
Limited-Term Bond Portfolio
________________________________________________________________________
Robert P. Black, Director $770 N/A $52,667
________________________________________________________________________
Calvin W. Burnett, PH.D, Director 770 N/A 55,583
________________________________________________________________________
Anthony W. Deering, Director 770 N/A 66,333
________________________________________________________________________
F. Pierce Linaweaver, Director 770 N/A 55,583
________________________________________________________________________
John G. Schreiber,Director 770 N/A 55,667
________________________________________________________________________
Anne Marie Whittemore, Director 770 N/A 32,667
________________________________________________________________________
George J. Collins, Chairman of the Board(b) - N/A-
________________________________________________________________________
James S. Riepe, Director(b) - N/A -
________________________________________________________________________
International Stock Portfolio
________________________________________________________________________
Leo C. Bailey, Director $1,260 N/A $64,583
________________________________________________________________________
Anthony W. Deering, Director 1,260 N/A 66,333
________________________________________________________________________
Donald W. Dick, Jr., Director 1,260 N/A 64,833
________________________________________________________________________
Addison Lanier, Director 1,260 N/A 64,583
________________________________________________________________________
M. David Testa, Chairman of the Board(b) - N/A-
________________________________________________________________________
Martin G. Wade, Director(b) - N/A -
(a) Not applicable. The Fund does not pay pension or retirement
benefits to officers or directors/trustees of the Fund.
(b) Any director/trustee of the Fund who is an officer or employee
of T. Rowe Price receives no remuneration from the Fund.
(c) Fund complex included 67 investment companies at December 31, 1994.
___________________________________________________________________________
PRINCIPAL HOLDERS
OF SECURITIES
As of the date of the prospectus, the officers and directors of each Fund, as
a group, owned less than 1% of the outstanding shares of the Fund.
___________________________________________________________________________
INVESTMENT
MANAGEMENT
SERVICES
Services (All Funds except International Stock Portfolio)
Under the Management Agreement, T. Rowe Price provides each Fund, except the
International Stock Portfolio, with discretionary investment services.
Specifically, T. Rowe Price is responsible for supervising and directing the
investments of each Fund in accordance with the Fund's investment objectives,
program, and restrictions as provided in its prospectus and this Statement of
Additional Information. T. Rowe Price is also responsible for effecting all
security transactions on behalf of the Fund, including the negotiation of
commissions and the allocation of principal business and portfolio brokerage.
In addition to these services, T. Rowe Price provides the Fund with certain
corporate administrative services, including: maintaining each Fund's
corporate existence and corporate records; registering and qualifying Fund
shares under federal and state laws; monitoring the financial, accounting, and
administrative functions of the Fund; maintaining liaison with the agents
employed by the Fund such as the Fund's custodian and transfer agent;
assisting the Fund in the coordination of such agents' activities; and
permitting T. Rowe Price's employees to serve as officers, directors, and
committee members of the Fund without cost to that Fund.
The Management Agreement also provides that T. Rowe Price, its directors,
officers, employees, and certain other persons performing specific functions
for the Fund will only be liable to the Fund for losses resulting from willful
misfeasance, bad faith, gross negligence, or reckless disregard of duty.
International Stock Portfolio
Under the Management Agreement for the International Stock Portfolio,
Price-Fleming provides the Fund with discretionary investment services.
Specifically, Price-Fleming is responsible for supervising and directing the
investments of the Fund in accordance with the Fund's investment objective,
program, and restrictions as provided in its prospectus and this Statement of
Additional Information. Price-Fleming is also responsible for effecting all
security transactions on behalf of the Fund, including the negotiation of
commissions and the allocation of principal business and portfolio brokerage.
In addition to these services, Price-Fleming provides the Fund with certain
corporate administrative services, including: maintaining the Fund's corporate
existence, corporate records, and registering and qualifying Fund shares under
federal and state laws; monitoring the financial, accounting, and
administrative functions of the Fund; maintaining liaison with the agents
employed by the Fund such as the Fund's custodian and transfer agent;
assisting the Fund in the coordination of such agents' activities; and
permitting Price-Fleming's employees to serve as officers, directors, and
committee members of the Fund without cost to the Fund.
The Management Agreement also provides that Price-Fleming, 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.
Under the Management Agreement, Price-Fleming is permitted to utilize the
services or facilities of others to provide it or the Fund with statistical
and other factual information, advice regarding economic factors and trends,
advice as to occasional transactions in specific securities, and such other
information, advice or assistance as Price-Fleming may deem necessary,
appropriate, or convenient for the discharge of its obligations under the
Management Agreement or otherwise helpful to the Fund.
Certain administrative support is provided by T. Rowe Price which receives
from Price-Fleming a fee of 0.15% of the market value of all assets in equity
accounts, 0.15% of the market value of all assets in active fixed income
accounts and 0.035% of the market value of all assets in passive fixed income
accounts under Price-Fleming's management.
Price-Fleming has entered into separate letters of agreement with Fleming
Investment Management Limited ("FIM") and Jardine Fleming Investment Holdings
Limited ("JFIH"), wherein FIM and JFIH have agreed to render investment
research and administrative support to Price-Fleming. FIM is a wholly-owned
subsidiary of Robert Fleming Asset Management Limited which is a wholly-owned
subsidiary of Robert Fleming Holdings Limited ("Robert Fleming Holdings").
JFIH is an indirect wholly-owned subsidiary of Jardine Fleming Group Limited.
Under the letters of agreement, these companies will provide Price-Fleming
with research material containing statistical and other factual information,
advice regarding economic factors and trends, advice on the allocation of
investments among countries and as between debt and equity classes of
securities, and research and occasional advice with respect to specific
companies. For these services, FIM and JFIH each receives a fee 0.075% of the
market value of all assets in equity accounts under Price-Fleming's
management. JFIH receives a fee of 0.075% of the market value of all assets
in active fixed income accounts and 0.0175% of such market value in passive
fixed income accounts under Price-Fleming's management.
Robert Fleming personnel have extensive research resources throughout the
world. A strong emphasis is placed on direct contact with companies in the
research universe. Robert Fleming personnel, who frequently speak the local
language, have access to the full range of research products available in the
market place and are encouraged to produce independent work dedicated solely
to portfolio investment management, which adds value to that generally
available.
Management Fee
Each Fund, pays the Manager an annual all-inclusive fee (the "Fee"). The Fee
is paid monthly to the Manager, 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 rate and multiplying this product by the net
assets of the Fund for that day as determined in accordance with the Fund's
prospectus as of the close of business from the previous business day on which
the Fund was open for business.
The Management Agreement between each Fund and the Manager, provides that the
Manager 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' fee and expenses
(including counsel fees and expenses) and such nonrecurring 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 of each Fund reserves the right to
impose additional fees against shareholder accounts to defray expenses which
would otherwise be paid by the Manager 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 the Manager the fee for each Fund is listed in
the chart below:
__________________________________________________________________________
Name of Fund FEE
__________________________________________________________________________
Limited-Term Bond Portfolio 0.70%
__________________________________________________________________________
Equity Income Portfolio 0.85%
__________________________________________________________________________
New America Growth Portfolio 0.85%
__________________________________________________________________________
Personal Strategy Balanced Portfolio 0.90%
__________________________________________________________________________
International Stock Portfolio 1.05%
__________________________________________________________________________
__________________________________________________________________________
DISTRIBUTOR FOR FUND
T. Rowe Price Investment Services, Inc. ("Investment Services"), a Maryland
corporation formed in 1980 as a wholly-owned subsidiary of T. Rowe Price,
serves as each Fund's distributor. Investment Services is registered as a
broker-dealer under the Securities Exchange Act of 1934 and is a member of the
National Association of Securities Dealers, Inc. The offering of each Fund's
shares is continuous.
Investment Services is located at the same address as each Fund and T. Rowe
Price - 100 East Pratt Street, Baltimore, Maryland 21202.
Investment Services serves as distributor to each Fund pursuant to an
Underwriting Agreement ("Underwriting Agreement"), which provides that the
Fund will pay all fees and expenses in connection with: registering and
qualifying its shares under the various state "blue sky" laws; preparing,
setting in type, printing, and mailing its prospectuses and reports to
shareholders; and issuing its shares, including expenses of confirming
purchase orders.
Each Underwriting Agreement provides that Investment Services will pay all
fees and expenses in connection with: printing and distributing prospectuses
and reports for use in offering and selling Fund shares; preparing, setting in
type, printing, and mailing all sales literature and advertising; Investment
Services' federal and state registrations as a broker-dealer; and offering and
selling Fund shares, except for those fees and expenses specifically assumed
by the Fund. Investment Services' expenses are paid by T. Rowe Price.
Investment Services acts as the agent of each Fund in connection with the sale
of its shares in all states in which the shares are qualified and in which
Investment Services is qualified as a broker-dealer. Under the Underwriting
Agreement, Investment Services accepts orders for Fund shares at net asset
value. No sales charges are paid by investors or any Fund.
__________________________________________________________________________
CUSTODIAN
State Street Bank and Trust Company is the custodian for each Fund's domestic
securities and cash, but it does not participate in the Fund's investment
decisions. Portfolio securities purchased in the U.S. are maintained in the
custody of the Bank and may be entered into the Federal Reserve Book Entry
System, or the security depository system of the Depository Trust Corporation.
The Funds have also entered into a Custodian Agreement with The Chase
Manhattan Bank, N.A., London, pursuant to which portfolio securities which are
purchased outside the U.S. are maintained in the custody of various foreign
branches of The Chase Manhattan Bank and such other custodians, including
foreign banks and foreign securities depositories as are approved by the
Fund's Board of Directors/Trustees in accordance with regulations under the
Investment Company Act of 1940. The Bank's main office is at 225 Franklin
Street, Boston, Massachusetts 02110. The address for The Chase Manhattan
Bank, N.A., London is Woolgate House, Coleman Street, London, EC2P 2HD,
England.
__________________________________________________________________________
CODE OF ETHICS
Limited-Term Bond, Equity Income, New America Growth and Personal Strategy
Balanced Funds
Each Fund's 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. In addition, employees are prohibited from engaging in
short-term trading (e.g., purchases and sales involving the same security
within 60 days). Any material violation of the Code of Ethics is reported to
the Board of the Fund. The Board also reviews the administration of the Code
of Ethics on an annual basis.
International Stock Portfolio
The Fund's investment adviser (Price-Fleming) 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; the security is subject to internal trading
restrictions. In addition, employees are prohibited from engaging in
short-term trading (e.g., purchases and sales involving the same security
within 60 days). Any material violation of the Code of Ethics is reported to
the Board of the Fund. The Board also reviews the administration of the Code
of Ethics on an annual basis.
__________________________________________________________________________
PORTFOLIO TRANSACTIONS
(ALL FUNDS, EXCEPT INTERNATIONAL STOCK PORTFOLIO)
Decisions with respect to the purchase and sale of portfolio securities on
behalf of each 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.
Each Fund's purchases and sales of fixed-income 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 Fund's purchase of fixed-income securities.
How Brokers and Dealers are Selected
Equity Securities. In purchasing and selling each Fund's portfolio securities,
it is T. Rowe Price's policy to obtain quality execution at the most favorable
prices through responsible brokers and dealers and, in the case of agency
transactions, at competitive commission rates. However, under certain
conditions, the Fund may pay higher brokerage commissions in return for
brokerage and research services. As a general practice, over-the-counter
orders are executed with market-makers. In selecting among market-makers, T.
Rowe Price generally seeks to select those it believes to be actively and
effectively trading the security being purchased or sold. In selecting
broker-dealers to execute each Fund's portfolio transactions, consideration is
given to such factors as the price of the security, the rate of the
commission, the size and difficulty of the order, the reliability, integrity,
financial condition, general execution and operational capabilities of
competing brokers and dealers, and brokerage and research services provided by
them. It is not the policy of T. Rowe Price to seek the lowest available
commission rate where it is believed that a broker or dealer charging a higher
commission rate would offer greater reliability or provide better price or
execution.
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.
With respect to equity and fixed income securities, T. Rowe Price may effect
principal transactions on behalf of the Fund with a broker or dealer who
furnishes brokerage and/or research services, designate any such broker or
dealer to receive selling concessions, discounts or other allowances, or
otherwise deal with any such broker or dealer in connection with the
acquisition of securities in underwritings. T. Rowe Price may receive
research services in connection with brokerage transactions, including
designations in fixed price offerings.
How Evaluations are Made of the Overall Reasonableness of Brokerage
Commissions Paid
On a continuing basis, T. Rowe Price seeks to determine what levels of
commission rates are reasonable in the marketplace for transactions executed
on behalf of the Fund. In evaluating the reasonableness of commission rates,
T. Rowe Price considers: (a) historical commission rates, both before and
since rates have been fully negotiable; (b) rates which other institutional
investors are paying, based on available public information; (c) rates quoted
by brokers and dealers; (d) the size of a particular transaction, in terms of
the number of shares, dollar amount, and number of clients involved; (e) the
complexity of a particular transaction in terms of both execution and
settlement; (f) the level and type of business done with a particular firm
over a period of time; and (g) the extent to which the broker or dealer has
capital at risk in the transaction.
Description of Research Services Received from Brokers and Dealers
T. Rowe Price receives a wide range of research services from brokers and
dealers. These services include information on the economy, industries,
groups of securities, individual companies, statistical information,
accounting and tax law interpretations, political developments, legal
developments affecting portfolio securities, technical market action, pricing
and appraisal services, credit analysis, risk measurement analysis,
performance analysis and analysis of corporate responsibility issues. These
services provide both domestic and international perspective. Research
services are received primarily in the form of written reports, computer
generated services, telephone contacts and personal meetings with security
analysts. In addition, such services may be provided in the form of meetings
arranged with corporate and industry spokespersons, economists, academicians
and government representatives. In some cases, research services are
generated by third parties but are provided to T. Rowe Price by or through
broker-dealers.
Research services received from brokers and dealers are supplemental to T.
Rowe Price's own research effort and, when utilized, are subject to internal
analysis before being incorporated by T. Rowe Price into its investment
process. As a practical matter, it would not be possible for T. Rowe Price's
Equity Research Division to generate all of the information presently provided
by brokers and dealers. T. Rowe Price pays cash for certain research services
received from external sources. T. Rowe Price also allocates brokerage for
research services which are available for cash. While receipt of research
services from brokerage firms has not reduced T. Rowe Price's normal research
activities, the expenses of T. Rowe Price could be materially increased if it
attempted to generate such additional information through its own staff. To
the extent that research services of value are provided by brokers or dealers,
T. Rowe Price may be relieved of expenses which it might otherwise bear.
T. Rowe Price has a policy of not allocating brokerage business in return for
products or services other than brokerage or research services. In accordance
with the provisions of Section 28(e) of the Securities Exchange Act of 1934,
T. Rowe Price may from time to time receive services and products which serve
both research and non-research functions. In such event, T. Rowe Price makes
a good faith determination of the anticipated research and non-research use of
the product or service and allocates brokerage only with respect to the
research component.
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.
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 or 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.
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 Funds. 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., each Fund's distributor. At the present time, T. Rowe Price
does not recapture commissions or underwriting discounts or selling group
concessions in connection with taxable securities acquired in underwritten
offerings. T. Rowe Price does, however, attempt to negotiate elimination of
all or a portion of the selling-group concession or underwriting discount when
purchasing tax-exempt municipal securities on behalf of its clients in
underwritten offerings.
Transactions with Related Brokers and Dealers
As provided in the Investment Management Agreement between each Fund and T.
Rowe Price, T. Rowe Price is responsible not only for making decisions with
respect to the purchase and sale of the Fund's portfolio securities, but also
for implementing these decisions, including the negotiation of commissions and
the allocation of portfolio brokerage and principal business. It is expected
that T. Rowe Price may place orders for the Fund's portfolio transactions with
broker-dealers through the same trading desk T. Rowe Price uses for portfolio
transactions in domestic securities. The trading desk accesses brokers and
dealers in various markets in which the Fund's foreign securities are located.
These brokers and dealers may include certain affiliates of Robert Fleming
Holdings Limited ("Robert Fleming Holdings") and Jardine Fleming Group Limited
("JFG"), persons indirectly related to T. Rowe Price. Robert Fleming
Holdings, through Copthall Overseas Limited, a wholly-owned subsidiary, owns
25% of the common stock of Rowe Price-Fleming International, Inc. ("RPFI"), an
investment adviser registered under the Investment Advisers Act of 1940.
Fifty percent of the common stock of RPFI is owned by TRP Finance, Inc., a
wholly-owned subsidiary of T. Rowe Price, and the remaining 25% is owned by
Jardine Fleming Holdings Limited, a subsidiary of JFG. JFG is 50% owned by
Robert Fleming Holdings and 50% owned by Jardine Matheson Holdings Limited.
Orders for the Fund's portfolio transactions placed with affiliates of Robert
Fleming Holdings and JFG will result in commissions being received by such
affiliates.
The Board of Directors of each Fund has authorized T. Rowe Price to utilize
certain affiliates of Robert Fleming and JFG in the capacity of broker in
connection with the execution of the Fund's portfolio transactions. These
affiliates include, but are not limited to, Jardine Fleming Securities Limited
("JFS"), a wholly-owned subsidiary of JFG, Robert Fleming & Co. Limited
("RF&Co."), Jardine Fleming Australia Securities Limited, and Robert Fleming,
Inc. (a New York brokerage firm). Other affiliates of Robert Fleming Holding
and JFG also may be used. Although it does not believe that the Fund's use of
these brokers would be subject to Section 17(e) of the Investment Company Act
of 1940, the Board of Directors/Trustees of the Fund has agreed that the
procedures set forth in Rule 17e-1 under that Act will be followed when using
such brokers.
___________________________________________________________________________
PORTFOLIO TRANSACTIONS
(INTERNATIONAL STOCK PORTFOLIO)
Investment or Brokerage Discretion
Decisions with respect to the purchase and sale of portfolio securities on
behalf of the Fund are made by Price-Fleming. Price-Fleming is also
responsible for implementing these decisions, including the allocation of
portfolio brokerage and principal business and the negotiation of commissions.
How Brokers and Dealers are Selected
Equity Securities. In purchasing and selling the Fund's portfolio securities,
it is Price-Fleming's policy to obtain quality execution at the most favorable
prices through responsible broker-dealers and, in the case of agency
transactions, at competitive commission rates where such rates are
negotiable. However, under certain conditions, the Fund may pay higher
brokerage commissions in return for brokerage and research services. In
selecting broker-dealers to execute the Fund's portfolio transactions,
consideration is given to such factors as the price of the security, the rate
of the commission, the size and difficulty of the order, the reliability,
integrity, financial condition, general execution and operational capabilities
of competing brokers and dealers, their expertise in particular markets and
the brokerage and research services they provide to Price-Fleming or the Fund.
It is not the policy of Price-Fleming to seek the lowest available commission
rate where it is believed that a broker or dealer charging a higher commission
rate would offer greater reliability or provide better price or execution.
Transactions on stock exchanges involve the payment of brokerage commissions.
In transactions on stock exchanges in the United States, these commissions are
negotiated. Traditionally, commission rates have generally not been
negotiated on stock markets outside the United States. In recent years,
however, an increasing number of overseas stock markets have adopted a system
of negotiated rates, although a number of markets continue to be subject to an
established schedule of minimum commission rates. It is expected that equity
securities will ordinarily be purchased in the primary markets, whether
over-the-counter or listed, and that listed securities may be purchased in the
over-the-counter market if such market is deemed the primary market. In the
case of securities traded on the over-the-counter markets, there is generally
no stated commission, but the price usually includes an undisclosed commission
or markup. In underwritten offerings, the price includes a disclosed, fixed
commission or discount.
Fixed-Income Securities. For fixed income securities, it is expected that
purchases and sales will ordinarily be transacted with the issuer, the
issuer's underwriter, or with a primary market maker acting as principal on a
net basis, with no brokerage commission being paid by the Fund. However, the
price of the securities generally includes compensation which is not disclosed
separately. Transactions placed though dealers who are serving as primary
market makers reflect the spread between the bid and asked prices.
With respect to equity and fixed income securities, Price-Fleming may effect
principal transactions on behalf of the Fund with a broker or dealer who
furnishes brokerage and/or research services, designate any such broker or
dealer to receive selling concessions, discounts or other allowances or
otherwise deal with any such broker or dealer in connection with the
acquisition of securities in underwritings. The prices the Fund pays to
underwriters of newly-issued securities usually include a concession paid by
the issuer to the underwriter. Price-Fleming may receive research services in
connection with brokerage transactions, including designations in fixed price
offerings.
Price-Fleming may cause the Fund to pay a broker-dealer who furnishes
brokerage and/or research services a commission for executing a transaction
that is in excess of the commission another broker-dealer would have received
for executing the transaction if it is determined that such commission is
reasonable in relation to the value of the brokerage and/or research services
which have been provided. In some cases, research services are generated by
third parties but are provided to Price-Fleming by or through broker-dealers.
Descriptions of Research Services Received from Brokers and Dealers
Price-Fleming receives a wide range of research services from brokers and
dealers covering investment opportunities throughout the world, including
information on the economies, industries, groups of securities, individual
companies, statistics, political developments, technical market action,
pricing and appraisal services, and performance analyses of all the countries
in which the Fund's portfolio is likely to be invested. Price-Fleming cannot
readily determine the extent to which commissions charged by brokers reflect
the value of their research services, but brokers occasionally suggest a level
of business they would like to receive in return for the brokerage and
research services they provide. To the extent that research services of value
are provided by brokers, Price-Fleming may be relieved of expenses which it
might otherwise bear. In some cases, research services are generated by third
parties but are provided to Price-Fleming by or through brokers.
Commissions to Brokers who Furnish Research Services
Certain broker-dealers which provide quality execution services also furnish
research services to Price-Fleming. Price-Fleming 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 its clients
to pay a broker which furnishes brokerage or research services a higher
commission than that which might be charged by another broker which does not
furnish brokerage or research services, or which furnishes brokerage or
research services deemed to be of lesser value, if such commission is deemed
reasonable in relation to the brokerage and research services provided by the
broker, viewed in terms of either that particular transaction or the overall
responsibilities of the adviser with respect to the accounts as to which it
exercises investment discretion. Accordingly, Price-Fleming may assess the
reasonableness of commissions in light of the total brokerage and research
services provided by each particular broker.
Miscellaneous
Research services furnished by brokers through which Price-Fleming effects
securities transactions may be used in servicing all accounts managed by
Price-Fleming. Conversely, research services received from brokers which
execute transactions for a particular Fund will not necessarily be used by
Price-Fleming exclusively in connection with the management of that Fund.
Some of Price-Fleming's other clients have investment objectives and programs
similar to those of the Fund. Price-Fleming 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 Price-Fleming's policy not to favor one client over another
in making recommendations or in placing orders. Price-Fleming 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. Price-Fleming 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.
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.
Transactions with Related Brokers and Dealers
As provided in the Investment Management Agreement between the Fund and
Price-Fleming, Price-Fleming is responsible not only for making decisions with
respect to the purchase and sale of the Fund's portfolio securities, but also
for implementing these decisions, including the negotiation of commissions and
the allocation of portfolio brokerage and principal business. It is expected
that Price-Fleming will often place orders for the Fund's portfolio
transactions with broker-dealers through the trading desks of certain
affiliates of Robert Fleming Holdings Limited ("Robert Fleming"), an affiliate
of Price-Fleming. Robert Fleming, through Copthall Overseas Limited, a
wholly-owned subsidiary, owns 25% of the common stock of Price-Fleming. Fifty
percent of the common stock of Price-Fleming is owned by TRP Finance, Inc., a
wholly-owned subsidiary of T. Rowe Price, and the remaining 25% is owned by
Jardine Fleming Holdings Limited, a subsidiary of Jardine Fleming Group
Limited ("JFG"). JFG is 50% owned by Robert Fleming and 50% owned by Jardine
Matheson Holdings Limited. The affiliates through whose trading desks such
orders may be placed include Fleming Investment Management Limited ("FIM"),
and Robert Fleming & Co. Limited ("RF&Co."). FIM and RF&Co. are wholly-owned
subsidiaries of Robert Fleming. These trading desks will operate under strict
instructions from the Fund's portfolio manager with respect to the terms of
such transactions. Neither Robert Fleming, JFG, nor their affiliates will
receive any commission, fee, or other remuneration for the use of their
trading desks, although orders for the Fund's portfolio transactions may be
placed with affiliates of Robert Fleming and JFG who may receive a commission.
The Board of Directors of the Fund has authorized Price-Fleming to utilize
certain affiliates of Robert Fleming and JFG in the capacity of broker in
connection with the execution of each Fund's portfolio transactions, provided
that Price-Fleming believes that doing so will result in an economic advantage
(in the form of lower execution costs or otherwise) being obtained for each
Fund. These affiliates include Jardine Fleming Securities Limited ("JFS"), a
wholly-owned subsidiary of JFG, RF&Co., Jardine Fleming Australia Securities
Limited, and Robert Fleming, Inc. (a New York brokerage firm).
The above-referenced authorization was made in accordance with Section 17(e)
of the Investment Company Act of 1940 (the "1940 Act") and Rule 17e-1
thereunder which require the Funds' independent directors to approve the
procedures under which brokerage allocation to affiliates is to be made and to
monitor such allocations on a continuing basis. Except with respect to tender
offers, it is not expected that any portion of the commissions, fees,
brokerage, or similar payments received by the affiliates of Robert Fleming in
such transactions will be recaptured by the Funds. The directors have
reviewed and from time to time may continue to review whether other recapture
opportunities are legally permissible and available and, if they appear to be,
determine whether it would be advisable for the Fund to seek to take advantage
of them.
During the year 1994, International Stock Portfolio paid Jardine Fleming
(Securities) Limited ("JFS"), Robert Fleming & Co. Limited ("RF&Co."), and Ord
Minnett $479, $38, and $756, respectively, in total brokerage commissions
(including discounts received in connection with underwritings) in connection
with the Fund's portfolio transactions. The brokerage commissions paid to
JFS, RF& Co., and Ord Minnett represented 2.34%, 0.19%, and 3.70%,
respectively, of the Fund's aggregate brokerage commissions paid during 1994.
The aggregate dollar amount of transactions effected through JFS, RF&Co., and
Ord Minnett involving the payment of commissions (including discounts received
in connection with underwritings) represented 2.06%, 0.45%, and 3.84%,
respectively, of the aggregate dollar amount of all transactions involving the
payment of commissions during 1994. In accordance with the written procedures
adopted pursuant to Rule 17e-1, the independent directors of the Fund reviewed
the Fund's 1994 transactions with affiliated brokers and determined that such
transactions resulted in an economic advantage to the Fund either in the form
of lower execution costs or otherwise.
Other
For the eight-month fiscal year ended December 31, 1994, the Limited-Term Bond
Portfolio engaged in portfolio transactions involving broker-dealers totaling
$17,730,000. The entire amount represented principal transactions as to which
the Fund had no knowledge of the profits or losses realized by the respective
broker-dealers for the eight-month fiscal year ended December 31, 1994. The
percentage of total portfolio transactions, 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 eight-month
fiscal year ended December 31, 1994 was approximately 79%.
For the fiscal period ended December 31, 1994, the total brokerage commissions
paid by the Equity Income Portfolio, including the discounts received by
securities dealers in connection with underwritings was $4,700. Of these
commissions, none was paid to 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 period ended December 31, 1994, the total brokerage commissions
paid by the New America Growth Portfolio, including the discounts received by
securities dealers in connection with underwritings was $15,700. Of these
commissions, approximately 22.2% was paid to 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 period ended December 31, 1994, the total brokerage commissions
paid by the International Stock Portfolio, including the discounts received by
securities dealers in connection with underwritings was $20,400. Of these
commissions, approximately 94% was paid to 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 Limited-Term Bond, Equity Income, New
America Growth and International Stock Portfolios for the fiscal period ended
December 31, 1994, were: 146.0%, 21.3%, 81.0%, and 3.4%, respectively.
__________________________________________________________________________
PRICING OF SECURITIES
Equity securities listed or regularly traded on a securities exchange are
valued at the last quoted sales price on the day the valuations are made. A
security which is listed or traded on more than one exchange is valued at the
quotation on the exchange determined to be the primary market for such
security. Listed securities that are not traded on a particular day and
securities regularly traded in the Over-the-Counter market are valued at the
mean of the latest bid and asked prices. Other equity securities are valued
at a price within the limits of the latest bid and asked prices deemed by the
Board of Directors, or by persons delegated by the Board, best to reflect fair
value.
Debt securities are generally traded in the over-the-counter market and are
valued at a price deemed best to reflect fair value as quoted by dealers who
make markets in these securities or by an independent pricing service.
Short-term debt securities are valued at their cost in local currency which,
when combined with accrued interest, approximates fair value.
For the purposes of determining the Fund's net asset value per share, all
assets and liabilities initially expressed in foreign currencies are converted
into U.S. dollars at the mean of the bid and offer prices of such currencies
against U.S. dollars quoted by any major bank.
Assets and liabilities for which the above valuation procedures are
inappropriate or are deemed not to reflect fair value are stated at fair
value, as determined in good faith by or under the supervision of officers of
the Funds, as authorized by the Board of Directors.
Trading in the portfolio securities of the International Stock Portfolio may
take place in various foreign markets on certain days (such as Saturday) when
the Fund is not open for business and does not calculate its net asset value.
In addition, trading in the Fund's portfolio securities may not occur on days
when the Fund is open. The calculation of the Fund's net asset value normally
will not take place contemporaneously with the determination of the value of
the Fund's portfolio securities. Events affecting the values of portfolio
securities that occur between the time their prices are determined and the
time the Fund's net asset value is calculated will not be reflected in the
Fund's net asset value unless Price-Fleming, under the supervision of the
Fund's Board of Directors, determines that the particular event should be
taken into account in computing the Fund's net asset value.
___________________________________________________________________________
NET ASSET VALUE
PER SHARE
The purchase and redemption price of the Fund's shares is equal to the Fund's
net asset value per share or share price. The Fund determines its net asset
value per share by subtracting the Fund's liabilities (including accrued
expenses and dividends payable) from its total assets (the market value of the
securities the Fund holds plus cash and other assets, including income accrued
but not yet received) and dividing the result by the total number of shares
outstanding. The net asset value per share of the Fund is normally calculated
as of the close of trading on the New York Stock Exchange ("NYSE") every day
the NYSE is open for trading. The NYSE is closed on the following days: New
Year's Day, Washington's Birthday, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day, and Christmas Day.
Determination of net asset value (and the offering, sale redemption and
repurchase of shares) for the Fund may be suspended at times (a) during which
the NYSE is closed, other than customary weekend and holiday closings, (b)
during which trading on the NYSE is restricted, (c) during which an emergency
exists as a result of which disposal by the Fund of securities owned by it is
not reasonably practicable or it is not reasonably practicable for the Fund
fairly to determine the value of its net assets, or (d) during which a
governmental body having jurisdiction over the Fund may by order permit such a
suspension for the protection of the Fund's shareholders; provided that
applicable rules and regulations of the Securities and Exchange Commission (or
any succeeding governmental authority) shall govern as to whether the
conditions prescribed in (b), (c), or (d) exist.
___________________________________________________________________________
DIVIDENDS AND
DISTRIBUTIONS
Unless you elect otherwise, the Fund's annual capital gain distribution, 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.
__________________________________________________________________________
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") and
also intends to diversify its assets in accordance with regulations under Code
Section 817(h).
In 1987, the Treasury Department indicated that it may issue regulations
addressing the circumstances in which a policyholder's control of the
investments of the insurance company separate account would result in the
policyholder being treated as the owner of such assets. Although there is no
present indication that such regulations will be issued, their adoption could
alter the tax treatment of the policyholder, separate account or insurance
company.
For tax purposes, the Fund must declare dividends equal to at least 98% of
ordinary income (as of December 31) and capital gains (as of October 31) in
order to avoid a federal excise tax and distribute 100% of ordinary income and
capital gains as of December 31 to avoid a federal income tax. In certain
circumstances, the Fund may not be required to comply with the excise tax
distribution requirements. It does not make any difference whether dividends
and capital gain distributions are paid in cash or in additional shares.
At the time a shareholder acquires Fund shares, the Fund's net asset value may
reflect undistributed income, capital gains or net unrealized appreciation of
securities held by the Fund which may be subsequently distributed as either
dividends or capital gain distributions.
If, in any taxable year, the Fund should not qualify as a regulated investment
company under the Code: (i) the 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) the Fund's
distributions to the extent made out of the Fund's current or accumulated
earnings and profits would be treated as ordinary dividends by shareholders
(regardless of whether they would otherwise have been considered capital gain
dividends), and (iii) the separate accounts investing in the Fund may fail to
satisfy the requirements of Code Section 817(h) which in turn could adversely
affect the tax status of life insurance and annuity contracts with premiums
invested in the affected separate accounts.
To the extent any Fund invests in foreign securities, the following would
apply:
Passive Foreign Investment Companies
The Fund may purchase the securities of certain foreign investment funds or
trusts called passive foreign investment companies. In addition to bearing
their proportionate share of a fund's expenses (management fees and operating
expenses) shareholders will also indirectly bear similar expenses of such
funds. Capital gains on the sale of such holdings will be deemed to be
ordinary income regardless of how long the Fund holds its investment. In
addition, the Fund may be subject to corporate income tax and an interest
charge on certain dividends and capital gains earned from these investments,
regardless of whether such income and gains are distributed to shareholders.
In accordance with tax regulations, the Fund intends to treat these securities
as sold on the last day of the Fund's fiscal year and recognize any gains for
tax purposes at that time; losses will not be recognized. Such gains will be
considered ordinary income which the Fund will be required to distribute even
though it has not sold the security and received cash to pay such
distributions.
Foreign Currency Gains and Losses
Foreign currency gains and losses, including the portion of gain or loss on
the sale of debt securities attributable to foreign exchange rate
fluctuations, are taxable as ordinary income. If the net effect of these
transactions is a gain, the dividend paid by the Fund will be increased; if
the result is a loss, the income dividend paid by the Fund will be decreased.
Adjustments to reflect these gains and losses will be made at the end of the
Fund's taxable year.
__________________________________________________________________________
CAPITAL STOCK
Each Fund's Charter authorizes the Board of Directors to classify and
reclassify any and all shares which are then unissued, including unissued
shares of capital stock into any number of classes or series, each class or
series consisting of such number of shares and having such designations, such
powers, preferences, rights, qualifications, limitations, and restrictions, as
shall be determined by the Board subject to the Investment Company Act and
other applicable law. The shares of any such additional classes or series
might therefore differ from the shares of the present class and series of
capital stock and from each other as to preferences, conversions or other
rights, voting powers, restrictions, limitations as to dividends,
qualifications or terms or conditions of redemption, subject to applicable
law, and might thus be superior or inferior to the capital stock or to other
classes or series in various characteristics. Each 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 each Fund has
authorized to issue without shareholder approval.
Except to the extent that the Fund's Board of Directors might provide by
resolution that holders of shares of a particular class are entitled to vote
as a class on specified matters presented for a vote of the holders of all
shares entitled to vote on such matters, there would be no right of class vote
unless and to the extent that such a right might be construed to exist under
Maryland law. The Charter contains no 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.
The various insurance companies own the outstanding shares of each Fund in
their separate accounts. These separate accounts are registered as investment
companies under the 1940 Act or are excluded from registration. Each
insurance company, as the Shareholder, is entitled to one vote for each full
share held (and fractional votes for fractional shares held). Under the
current laws the insurance companies must vote the shares held in registered
separate accounts in accordance with voting instructions received from
variable Contract Holders or Participants. Fund shares for which Contract
Holders or Participants are entitled to give voting instructions, but as to
which no voting instructions are received, and shares owned by the insurance
companies or affiliated companies in the separate accounts, will be voted in
proportion to the shares for which voting instructions have been received.
There will normally be no meetings of shareholders for the purpose of electing
directors unless and until such time as less than a majority of the directors
holding office have been elected by shareholders, at which time the directors
then in office will call a shareholders' meeting for the election of
directors. Except as set forth above, the directors shall continue to hold
office and may appoint successor directors. Voting rights are not cumulative,
so that the holders of more than 50% of the shares voting in the election of
directors can, if they choose to do so, elect all the directors of the Fund,
in which event the holders of the remaining shares will be unable to elect any
person as a director. As set forth in the By-Laws of the Fund, a special
meeting of shareholders of the Fund shall be called by the Secretary of the
Fund on the written request of shareholders entitled to cast at least 10% of
all the votes of the Fund entitled to be cast at such meeting. Shareholders
requesting such a meeting must pay to the Fund the reasonably estimated costs
of preparing and mailing the notice of the meeting. The Fund, however, will
otherwise assist the shareholders seeking to hold the special meeting in
communicating to the other shareholders of that Fund 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 Fund.
___________________________________________________________________________
INDEPENDENT
ACCOUNTANTS
Price Waterhouse LLP, whose address is 7 St. Paul Street, Suite 1700,
Baltimore, MD 21202 are the independent accountants to each Fund.
The financial statements of the Fund for the year ended December 31, 1994, and
the report of independent accountants are included in the Fund's Annual
Report. A copy of the Annual Report accompanies this Statement of Additional
Information. The following financial statements and the report of independent
accountants appearing in the Annual Report for the year ended December 31,
1994, are incorporated into this Statement of Additional Information by
reference:
International Stock Portfolio Page
____
Report of Independent Accountants. . . . . . . . . . . . . .11
Statement of Net Assets, December 31, 1994 . . . . . . . . 4-7
Statement of Operations, From March 31, 1994
(Commencement of Operations) to
December 31, 1994. . . . . . . . . . . . . . . . . . . . 8
Statement of Changes in Net Assets, From March 31,
1994 (Commencement of Operations) to
December 31, 1994. . . . . . . . . . . . . . . . . . . . 8
Notes to Financial Statements, December 31, 1994 . . . . . . 9
Financial Highlights, From March 31, 1994
(Commencement of Operations) to
December 31, 1994. . . . . . . . . . . . . . . . . . . .10
Equity Income Portfolio Page
____
Report of Independent Accountants. . . . . . . . . . . . . . .8
Statement of Net Assets, December 31, 1994 . . . . . . . . .3-5
Statement of Operations, From March 31, 1994
(Commencement of Operations) to December 31, 1994 . . . . .5
Statement of Changes in Net Assets, From March 31, 1994
(Commencement of Operations) to December 31, 1994 . . . . .6
Notes to Financial Statements, December 31, 1994 . . . . . .6-7
Financial Highlights, From March 31, 1994
(Commencement of Operations) to
December 31, 1994 . . . . . . . . . . . . . . . . . . . . . 7
New America Growth Portfolio Page
____
Report of Independent Accountants. . . . . . . . . . . . . . .7
Statement of Net Assets, December 31, 1994 . . . . . . . . .3-4
Statement of Operations, From March 31, 1994
(Commencement of Operations) to December 31, 1994 . . . . .4
Statement of Changes in Net Assets, From March 31, 1994
(Commencement of Operations) to December 31, 1994 . . . . .5
Notes to Financial Statements, December 31, 1994 . . . . . .5-6
Financial Highlights, From March 31, 1994
(Commencement of Operations) to
December 31, 1994 . . . . . . . . . . . . . . . . . . . . . 6
Limited-Term Bond Portfolio Page
____
Report of Independent Accountants. . . . . . . . . . . . . . .8
Statement of Net Assets, December 31, 1994 . . . . . . . . .4-5
Statement of Operations, From May 13, 1994
(Commencement of Operations) to December 31, 1994 . . . . .5
Statement of Changes in Net Assets, From May 13, 1994
(Commencement of Operations) to December 31, 1994 . . . . .6
Notes to Financial Statements, December 31, 1994 . . . . . .6-7
Financial Highlights, From May 13, 1994
(Commencement of Operations) to
December 31, 1994 . . . . . . . . . . . . . . . . . . . . .7
___________________________________________________________________________
RATINGS OF
COMMERCIAL PAPER
Moody's Investors Service, Inc.: The rating of Prime-1 is the highest
commercial paper rating assigned by Moody's. Among the factors considered by
Moody's in assigning ratings are the following: valuation of the management
of the issuer; economic evaluation of the issuer's industry or industries and
an appraisal of speculative-type risks which may be inherent in certain areas;
evaluation of the issuer's products in relation to competition and customer
acceptance; liquidity; amount and quality of long-term debt; trend of earnings
over a period of 10 years; financial strength of the parent company and the
relationships which exist with the issuer; and recognition by the management
of obligations which may be present or may arise as a result of public
interest questions and preparations to meet such obligations. These factors
are all considered in determining whether the commercial paper is rated P1,
P2, or P3.
Standard & Poor's Corporation: Commercial paper rated A (highest quality) by
S&P has the following characteristics: liquidity ratios are adequate to meet
cash requirements; long-term senior debt is rated "A" or better, although in
some cases "BBB" credits may be allowed. The issuer has access to at least
two additional channels of borrowing. Basic earnings and cash flow have an
upward trend with allowance made for unusual circumstances. Typically, the
issuer's industry is well established and the issuer has a strong position
within the industry. The reliability and quality of management are
unquestioned. The relative strength or weakness of the above factors
determines whether the issuer's commercial paper is rated A1, A2, or A3.
Fitch Investors Service, Inc.: Fitch 1 - Highest grade. Commercial paper
assigned this rating is regarded as having the strongest degree of assurance
for timely payment.
Fitch 2 - Very good grade. Issues assigned this rating reflect an assurance of
timely payment only slightly less in degree than the strongest issues.
___________________________________________________________________________
RATINGS OF CORPORATE
DEBT SECURITIES
Moody's Investors Services, Inc. (Moody's)
Aaa - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edge."
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 futures
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 - Bonds rated C represent the lowest-rated, and have extremely poor
prospects of attaining investment standing.
Standard & Poor's Corporation (S&P)
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 - Bonds rated AA also qualify as high-quality debt obligations. Capacity
to pay principal and interest is very strong.
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 capacity to pay principal and interest for bonds
in this category than for bonds in the A category.
BB, C, 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 - Bonds rated D are in default.
Fitch Investors Service, Inc.
AAA - High grade, broadly marketable, suitable for investment by trustees and
fiduciary institutions, and liable to but slight market fluctuation other than
through changes in the money rate. The prime feature of a "AAA" bond is the
showing of earnings several times or many times interest requirements for such
stability of applicable interest that safety is beyond reasonable question
whenever changes occur in conditions. Other features may enter, such as a
wide margin of protection through collateral, security or direct lien on
specific property. Sinking funds or voluntary reduction of debt by call or
purchase or often factors, while guarantee or assumption by parties other than
the original debtor may influence their rating.
AA - Of safety virtually beyond question and readily salable. Their merits
are not greatly unlike those of "AAA" class but a bond so rated may be junior
though of strong lien, or the margin of safety is less strikingly broad. The
issue may be the obligation of a small company, strongly secured, but
influenced as to rating by the lesser financial power of the enterprise and
more local type of market.
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.
