PAGE 1
Prospectus for the T. Rowe Price New America Growth Portfolio, dated March 31,
1994, should be inserted here.
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T. ROWE PRICE EQUITY INCOME PORTFOLIO
PROSPECTUS
MARCH 31, 1994
T. ROWE PRICE
EQUITY SERIES, INC.
TABLE OF CONTENTS
Investment Summary...........................................................1
Investment Objective.........................................................2
Fund Characteristics.........................................................2
Investment Program...........................................................2
Summary of Fund Fees and Expenses............................................3
Voting Rights................................................................3
Investing in the Stock Market................................................3
Investment Practices.........................................................3
Performance Information......................................................6
Capital Stock................................................................7
Purchase and Redemption of Shares............................................7
NAV, Pricing, and Effective Date.............................................8
Dividends and Taxation.......................................................8
Management of the Fund.......................................................9
Expenses and Management Fee..................................................9
Other Insurance Products.....................................................9
T ROWE PRICE LOGO
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INVESTMENT SUMMARY
The Fund's investment objective is to provide substantial dividend income and
also capital appreciation by investing primarily in dividend-paying common
stocks of established companies. Dividends, if any, are paid quarterly.
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T. Rowe Price Associates, Inc. (T. Rowe Price) was founded in 1937 by the late
Thomas Rowe Price, Jr. As of December 31, 1993, the firm and its affiliates
managed over $50 billion including more than $4 billion in conservative,
dividend focused equity investments, for approximately three million
individual and institutional investor accounts.
This prospectus contains information that a prospective Contract Holder or
Participant should know about the Fund before investing. PLEASE KEEP IT FOR
FUTURE REFERENCE. A Statement of Additional Information for the Fund (dated
March 31, 1994) has been filed with the Securities and Exchange Commission and
is incorporated by reference in this prospectus. It is available at no charge
by contacting your insurance company.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION, OR ANY STATE SECURITIES COMMISSION, PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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INVESTMENT OBJECTIVE
The Fund's investment objective is to provide substantial dividend income and
also capital appreciation by investing primarily in dividend-paying common
stocks of established companies.
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FUND CHARACTERISTICS
In pursuing its objective, the Fund emphasizes companies with favorable
prospects for increasing dividend income, and secondarily, capital
appreciation. Over time, the income component (dividends and interest earned)
of the Fund's investments is expected to be a significant contributor to the
Fund's total return. The Fund's income yield is expected to be significantly
above that of the Standard & Poor's 500 Stock Index. Total return will consist
primarily of dividend income and secondarily of capital appreciation (or
depreciation).
The Fund's share price will fluctuate with changing market conditions, and
your investment may be worth more or less when redeemed than when purchased.
The Fund should not be relied upon as a complete investment program, nor used
to play short-term swings in the stock market. The Fund cannot guarantee it
will achieve its investment objective.
Shares of the Fund are currently being offered to insurance company separate
accounts 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 are not the shareholders of the
Fund. Rather, the separate account is the shareholder. The variable annuity
and variable life contracts are described in separate prospectuses issued by
the insurance companies. The Fund assumes no responsibility for such
prospectuses or variable annuity or life contracts.
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INVESTMENT PROGRAM
Investing in high dividend-paying
companies.
The investment program of the Fund is based on several premises. First, T.
Rowe Price believes that, over time, dividend income can account for a
significant component of the total return from equity investments. Second,
dividends are normally a more stable and predictable source of return than
capital appreciation. While the price of a company's stock generally increases
or decreases in response to short-term earnings and market fluctuations, its
dividends are generally less volatile. Finally, T. Rowe Price believes that
stocks which distribute a high level of current income tend to have less price
volatility than those which pay below average dividends.
To achieve its objective, the Fund, under normal circumstances, will invest at
least 65% of its assets in income-producing common stocks, whose prospects for
dividend growth and capital appreciation are considered favorable by T. Rowe
Price. To enhance capital appreciation potential, the Fund also uses a
value-oriented approach, which means it invests in stocks it believes are
currently undervalued in the market place. The Fund's investments will
generally be made in companies which share some of the following
characteristics:
[bullet]established operating histories;
[bullet]above-average current dividend yields relative to the S&P 500;
[bullet]low price/earnings ratios relative to the S&P 500;
[bullet]sound balance sheets and other financial characteristics; and
[bullet]low stock price relative to company's underlying value as measured
by assets, earnings, cash flow or business franchises.
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The Fund may also invest its assets in fixed income securities (corporate,
government, and municipal bonds of various maturities). The Fund would invest
in municipal bonds when the expected total return from such bonds appears to
exceed the total returns obtainable from corporate or government bonds of
similar credit quality. Interest earned on municipal bonds purchased by the
Fund will be taxable income to Fund shareholders. Although the Fund will
invest primarily in U.S. common stocks, it may also purchase other types of
securities, for example, foreign securities, convertible securities and
warrants, when considered consistent with the Fund's investment objective and
program. The Fund may also engage in a variety of investment management
practices, such as buying and selling futures and options.
Please see INVESTMENT PRACTICES for a more complete description of these and
other permissible Fund investments.
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SUMMARY OF FUND FEES
AND EXPENSES
MANAGEMENT FEE. The Fund pays T. Rowe Price a single, all-inclusive fee of
0.85% of the Fund's average daily net assets to cover investment management
and operating expenses.
VARIABLE ANNUITY AND VARIABLE LIFE CHARGES. Variable annuity and variable life
fees and charges are in addition to those described above and are described in
the variable annuity prospectuses.
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VOTING RIGHTS
The shares of the Fund have equal voting rights. The various insurance
companies own the outstanding shares of the Fund in their separate accounts.
These separate accounts are registered under the Investment Company Act of
1940 or are excluded from registration thereunder. Under current law the
insurance companies must vote the shares held in registered separate accounts
in accordance with voting instructions received from variable Contract Holders
or Participants having the right to give such instructions.
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INVESTING IN THE
STOCK MARKET
Common stocks offer a way to invest for long-term growth of capital. As the
U.S. economy has expanded, corporate profits have grown, and share values have
risen.
Economic growth has been punctuated by periodic declines. Share prices of even
the best managed, most profitable corporations are subject to market risk,
which means their stock prices can decline. In addition, swings in investor
psychology and/or significant trading by large institutional investors can
result in price fluctuations. For this reason, equity investors should have a
long-term investment horizon and be willing to wait out bear markets.
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INVESTMENT PRACTICES
This section takes a detailed look at some of the types of securities the Fund
may hold in its portfolio and the various kinds of investment practices that
may be used in day-to-day portfolio management. The Fund's investment program
is subject to further restrictions and risks described in the Statement of
Additional Information.
Shareholder approval is required to substantively change the Fund's objective
and certain investment restrictions noted in the following section as
"fundamental policies." The managers also follow certain "operating policies"
which can be changed without shareholder approval. However, significant
changes are discussed with shareholders in Fund reports.
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Fund managers have considerable
leeway in choosing investment
strategies and selecting securities
they believe will help the Fund
achieve its objective.
TYPES OF PORTFOLIO SECURITIES
In seeking to meet its investment objective, the Fund may invest in any type
of security whose investment characteristics are consistent with the Fund's
investment program. These and some of the other investment techniques the Fund
may use are described in the following pages.
Fundamental Policy. The Fund will not purchase a security if, as a result,
with respect to 75% of its total assets, more than 5% of its total assets
would be invested in securities of the issuer or more than 10% of the voting
securities of the issuer would be held by the Fund.
COMMON AND PREFERRED STOCKS. Stocks represent shares of ownership in a
company. Generally, preferred stock has a specified dividend and ranks after
bonds and before common stocks in its claim on income for dividend payments
and on assets should the company be liquidated. After other claims are
satisfied, common stockholders participate in company profits on a pro rata
basis; profits may be paid out in dividends or reinvested in the company to
help it grow. Increases and decreases in earnings are usually reflected in a
company's stock price, so common stocks generally have the greatest
appreciation and depreciation potential of all corporate securities. While
most preferred stocks pay a dividend, the Fund may purchase preferred stock
where the issuer has omitted, or is in danger of omitting, payment of its
dividend. Such investments would be made primarily for their capital
appreciation potential.
CONVERTIBLE SECURITIES AND WARRANTS. The Fund may invest in debt or preferred
equity securities convertible into or exchangeable for equity securities.
Traditionally, convertible securities have paid dividends or interest at rates
higher than common stocks but lower than non-convertible securities. They
generally participate in the appreciation or depreciation of the underlying
stock into which they are convertible, but to a lesser degree. In recent
years, convertibles have been developed which combine higher or lower current
income with options and other features. Warrants are options to buy a stated
number of shares of common stock at a specified price any time during the life
of the warrants (generally, two or more years).
FOREIGN SECURITIES. The Fund may invest in foreign securities. These include
non-dollar denominated securities traded outside of the U.S. and dollar
denominated securities traded in the U.S. (such as ADRs). Such investments
increase a portfolio's diversification and may enhance return, but they also
involve some special risks such as exposure to potentially adverse local
political and economic developments; nationalization and exchange controls;
potentially lower liquidity and higher volatility; possible problems arising
from accounting, disclosure, settlement, and regulatory practices that differ
from U.S. standards; and the chance that fluctuations in foreign exchange
rates will decrease the investment's value (favorable changes can increase its
value).
Operating Policy. The Fund may invest up to 25% of its total assets in foreign
securities.
FIXED INCOME SECURITIES. The Fund may invest in debt securities of any type
without regard to quality or rating. Such securities would be purchased in
companies which meet the investment criteria for the Fund. The price of a bond
fluctuates with changes in interest rates, rising when interest rates fall and
falling when interest rates rise.
HIGH YIELD/HIGH RISK INVESTING. The total return and yield of lower quality
(high yield/high risk) bonds, commonly referred to as "junk bonds," can be
expected to fluctuate more than the total return and yield of higher quality,
shorter-term bonds, but not as much as common stocks. Junk bonds are regarded
as predominantly speculative with respect to the issuer's continuing ability
to meet principal and interest payments.
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Operating Policy. The Fund will not purchase a non-investment grade debt
security (or junk bond) if immediately after such purchase the Fund would have
more than 10% of its total assets invested in such securities.
HYBRID INSTRUMENTS. These instruments can combine the characteristics of
securities, futures and options. For example, the principal amount, redemption
or conversion terms of a security could be related to the market price of some
commodity, currency or securities index. Such securities may bear interest or
pay dividends at below market (or even relatively nominal) rates. Under
certain conditions, the redemption value of such an investment could be zero.
Hybrids can have volatile prices and limited liquidity and their use by the
Fund may not be successful.
Operating Policy. The Fund may invest up to 10% of its total assets in hybrid
instruments.
PRIVATE PLACEMENTS (RESTRICTED SECURITIES). These securities are sold directly
to a small number of investors, usually institutions. Unlike public offerings,
such securities are not registered with the SEC. Although certain of these
securities may be readily sold, for example under Rule 144A, the sale of
others may involve substantial delays and additional costs.
Operating Policy. The Fund will not invest more than 15% of its net assets in
illiquid securities, but not more than 5% in restricted securities (other than
Rule 144A securities).
TYPES OF MANAGEMENT PRACTICES
CASH POSITION. The Fund will hold a certain portion of its assets in money
market securities, including repurchase agreements, in the two highest rating
categories, maturing in one year or less. For temporary, defensive purposes,
the Fund may invest without limitation in such securities. This reserve
position provides flexibility in meeting redemptions, expenses, and the timing
of new investments, and serves as a short-term defense during periods of
unusual market volatility.
BORROWING MONEY AND TRANSFERRING ASSETS. The Fund can borrow money from banks
as a temporary measure for emergency purposes, to facilitate redemption
requests, or for other purposes consistent with the Fund's investment
objectives and program. Such borrowings may be collateralized with Fund
assets, subject to restrictions.
Fundamental Policy. Borrowings may not exceed 33 1/3% of total Fund assets.
Operating Policies. The Fund may not transfer as collateral any portfolio
securities except as necessary in connection with permissible borrowings or
investments, and then such transfers may not exceed 33 1/3% of the Fund's
total assets. The Fund may not purchase additional securities when borrowings
exceed 5% of total assets.
FUTURES AND OPTIONS. Futures are often used to manage risk, because they
enable the investor to buy or sell an asset in the future at an agreed upon
price. Options give the investor the right, but not the obligation, to buy or
sell an asset at a predetermined price in the future. The Fund may buy and
sell futures contracts (and options on such contracts) to manage its exposure
to changes in securities prices and foreign currencies and as an efficient
means of adjusting its overall exposure to certain markets. The Fund may
purchase, sell, or write call and put options on securities, financial
indices, and foreign currencies.
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Futures contracts and options may not always be successful hedges; their
prices can be highly volatile; using them could lower the Fund's total return;
and the potential loss from the use of futures can exceed the Fund's initial
investment in such contracts.
Operating Policies. Futures: Initial margin deposits and premiums on options
used for non-hedging purposes will not equal more than 5% of the Fund's net
asset value. Options on securities: The total market value of securities
against which the Fund has written call or put options may not exceed 25% of
its total assets. The Fund will not commit more than 5% of its total assets to
premiums when purchasing call or put options.
MANAGING FOREIGN CURRENCY RISK. Investors in foreign securities may "hedge"
their exposure to potentially unfavorable currency changes by purchasing a
contract to exchange one currency for another on some future date at a
specified exchange rate. In certain circumstances, a "proxy currency" may be
substituted for the currency in which the investment is denominated, a
strategy known as "proxy hedging." Although foreign currency transactions will
be used primarily to protect the Fund's foreign securities from adverse
currency movements relative to the dollar, they involve the risk that
anticipated currency movements will not occur and the Fund's total return
could be reduced.
LENDING OF PORTFOLIO SECURITIES. Like other mutual funds, the Fund may lend
securities to broker-dealers, other institutions, or other persons to earn
additional income. The principal risk is the potential insolvency of the
broker-dealer or other borrower. In this event, the Fund could experience
delays in recovering its securities and possibly capital losses.
Fundamental Policy. The value of loaned securities may not exceed 33 1/3% of
the Fund's total assets.
PORTFOLIO TRANSACTIONS. The Fund will not generally trade in securities for
short-term profits but, when circumstances warrant, securities may be
purchased and sold without regard to the length of time held. The portfolio
turnover rate is not expected to exceed 100%.
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PERFORMANCE INFORMATION
The Fund may advertise total return figures on both a cumulative and compound
average annual basis and compare them to various indices (e.g., the S&P 500),
other mutual funds or other performance measures. (The total return of the
Fund will consist primarily of dividend income and secondarily of capital
appreciation or depreciation). Cumulative total return compares the amount
invested at the beginning of a period with the amount redeemed at the end of
the period, assuming the reinvestment of all dividends and capital gain
distributions. The compound average annual total return indicates a yearly
compound average of the Fund's performance, derived from the cumulative total
return. The annual compound rate of return for the Fund may vary from any
average. Further information about the Fund's performance is contained in its
annual report which is available free of charge.
Total returns quoted for the Fund include the effect of deducting the Fund's
expenses, but may not include charges and expenses attributable to any
particular insurance product. Since you can only purchase shares of the Fund
through an insurance product, you should carefully review the prospectus of
the insurance product you have chosen for information on relevant charges and
expenses. Excluding these charges from quotations of the Fund's performance
has the effect of increasing the performance quoted.
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CAPITAL STOCK
T. Rowe Price Equity Series, Inc. is a Maryland corporation organized in 1994
and registered with the Securities and Exchange Commission under the
Investment Company Act of 1940 as a diversified, open-end investment company,
commonly known as a "mutual fund." A mutual fund, such as the Fund, enables
shareholders to: (1) obtain professional management of investments, including
T. Rowe Price's proprietary research; (2) diversify their portfolio to a
greater degree than would be generally possible if they were investing as
individuals and thereby reduce, but not eliminate risks; and (3) simplify the
recordkeeping and reduce transaction costs associated with investments.
Currently, the Corporation consists of two series, each representing a
separate class of shares having different objectives and investment policies.
The two series are the Equity Income Portfolio and the New America Growth
Portfolio, both established in 1994. The T. Rowe Price New America Growth
Portfolio is described in a separate prospectus. The Corporation's charter
provides that the Board of Directors may issue additional series of shares
and/or additional classes of shares for each series.
The Fund has an Investment Advisory Committee composed of the following
members: Brian C. Rogers, Chairman, Thomas H. Broadus, Jr., Richard P. Howard,
and William J. Stromberg. The Committee Chairman has day-to-day responsibility
for managing the Fund and works with the Committee in developing and executing
the Fund's investment program. Mr. Rogers has been Chairman of the Committee
since its inception in 1994. He joined T. Rowe Price in 1982 and has been
managing investments since 1983.
SHAREHOLDER RIGHTS. The Fund issues one class of capital stock, all shares of
which have equal rights with regard to voting, redemptions, dividends,
distributions, and liquidations. Fractional shares have voting rights and
participate in any distributions and dividends. Shareholders have no
preemptive or conversion rights; nor do they have cumulative voting rights.
When the Fund's shares are issued, they are fully paid and nonassessable. The
Fund does not routinely hold annual meetings of shareholders. However, if
shareholders representing at least 10% of all votes of the Fund entitled to be
cast so desire, they may call a special meeting of shareholders of the Fund
for the purpose of voting on the question of the removal of any director(s).
The total authorized capital stock of the Fund consists of 1,000,000,000
shares, each having a par value of $.0001. As of the date of this prospectus,
T. Rowe Price owned 10,000 shares of the Fund which represented all of the
Fund's outstanding shares. As of February 28, 1994, there were 3,272,854
shareholders in the other 55 T. Rowe Price Funds.
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PURCHASE AND REDEMPTION
OF SHARES
For instructions on how to purchase and redeem shares of the Fund, read the
separate account prospectus.
Shares of the Fund are sold and redeemed without the imposition of any sales
commission or redemption charge. However, certain deferred sales charges and
other charges may apply to the annuity contract. Those charges are disclosed
in the separate account prospectus.
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NAV, PRICING, AND
EFFECTIVE DATE
NET ASSET VALUE PER SHARE (NAV). The NAV per share, or share price, for the
Fund is normally determined as of 4:00 pm Eastern Time (ET) each day the New
York Stock Exchange is open. The Fund's share price is calculated by
subtracting its liabilities from its total assets and dividing the result by
the total number of shares outstanding. Among other things, the Fund's
liabilities include accrued expenses and dividends payable, and its total
assets include portfolio securities valued at market as well as income accrued
but not yet received.
PURCHASES. The insurance companies purchase shares of the Fund for separate
accounts, using premiums allocated by the Contract Holders or Participants.
Shares are purchased at the NAV next determined after the insurance company
receives the premium payment in acceptable form. Initial and subsequent
payments allocated to the Fund are subject to the limits stated in the
separate account prospectus issued by the insurance company.
REDEMPTIONS. The insurance companies redeem shares of the Fund to make benefit
or surrender payments under the terms of its Contracts. Redemptions are
processed on any day on which the New York Stock Exchange is open and are
priced at the Fund's NAV next determined after the insurance company receives
a surrender request in acceptable form.
PROCEEDS. Payment for redeemed shares will be made promptly, but in no event
later than seven days. However, the right of redemption may be suspended or
the date of payment postponed in accordance with the Investment Company Act of
1940. The amount received upon redemption of the shares of the Fund may be
more or less than the amount paid for the shares, depending on the
fluctuations in the market value of the assets owned by the Fund.
The Fund reserves the right to change the time at which purchases,
redemptions, and exchanges are priced if the New York Stock Exchange closes at
a time other than 4:00 pm ET or an emergency exists.
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DIVIDENDS AND TAXATION
For a discussion of the tax status of your variable annuity contract, refer to
the prospectus of your insurance company's separate account.
DIVIDENDS AND DISTRIBUTIONS. The policy of the Fund is to distribute all of
its net investment income and net capital gains each year to its shareholders,
which are the separate accounts established by the various insurance companies
in connection with their issuance of variable annuity and life contracts.
Dividends from net investment income are declared and paid quarterly. All Fund
distributions made to a separate account will be reinvested automatically in
additional Fund shares, unless a shareholder (separate account) elects to
receive distributions in cash. Under current law, dividends and distributions
made by the Fund to separate accounts, generally, are not taxable to the
separate accounts, the insurance company or the Contract Holder, provided that
the separate account meets the diversification requirements of Section 817(h)
of the Internal Revenue Code of 1986, as amended, and other tax related
requirements are satisfied. The Fund intends to diversify its investments in
the manner required under Code Section 817(h).
FOREIGN TRANSACTIONS. If the Fund pays nonrefundable taxes to foreign
governments during the year, the taxes will reduce the Fund's dividends.
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MANAGEMENT OF THE FUND
INVESTMENT MANAGER. T. Rowe Price is responsible for selection and management
of the Fund's portfolio investments. T. Rowe Price serves as investment
manager to a variety of individual and institutional investors, including
limited and real estate partnerships and other mutual funds.
BOARD OF DIRECTORS. The management of the Fund's business and affairs is the
responsibility of the Fund's Board of Directors.
PORTFOLIO TRANSACTIONS. Decisions with respect to the purchase and sale of the
Fund's portfolio securities are made by T. Rowe Price. The Fund's Board of
Directors has authorized T. Rowe Price to utilize certain brokers indirectly
related to T. Rowe Price in the capacity of broker in connection with the
execution of the Fund's portfolio transactions.
INVESTMENT SERVICES. T. Rowe Price Investment Services, Inc., a wholly-owned
subsidiary of T. Rowe Price, is the distributor for this Fund as well as all
other T. Rowe Price Funds.
TRANSFER AND DIVIDEND DISBURSING AGENT, SHAREHOLDER SERVICING AND
ADMINISTRATIVE. TRP Services, a wholly-owned subsidiary of T. Rowe Price,
serves the Fund as transfer and dividend disbursing agent. T. Rowe Price
calculates the daily share price and maintains the portfolio and general
accounting records of the Fund. The address for TRP Services is 100 East Pratt
Street, Baltimore, Maryland 21202.
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EXPENSES AND MANAGEMENT
FEE
Under the management agreement, all expenses of the Fund will be paid by T.
Rowe Price, except interest, taxes, brokerage commissions, directors' fees and
expenses (including counsel fees and expenses) and extraordinary expenses. The
Board of Directors of the Fund reserves the right to impose additional fees
against shareholder accounts to defray expenses which would otherwise be paid
by T. Rowe Price under the management agreement. The Board does not anticipate
levying such charges; such a fee, if charged, may be retained by the Fund or
paid to T. Rowe Price.
THE MANAGEMENT FEE. The Fund pays T. Rowe Price an annual all-inclusive fee of
0.85% based on its average daily net assets. The Fund calculates and accrues
the fee daily. This fee pays for investment management services and other
operating costs.
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OTHER INSURANCE PRODUCTS
The Fund may serve as an investment medium for both variable annuity contracts
and variable life insurance policies. Shares of the Fund may be offered to
separate accounts established by any number of insurance companies. The Fund
currently does not foresee any disadvantages to variable annuity contract
owners due to the fact that the Fund may serve as an investment medium for
both variable life insurance policies and annuity contracts; however, due to
differences in tax treatment or other considerations, it is theoretically
possible that the interests of owners of annuity contracts and insurance
policies for which the Fund serves as an investment medium might at some time
be in conflict. However, the Fund's Board of Directors is required to monitor
events to identify any material conflicts between variable annuity contract
owners and variable life policy owners, and will determine what action, if
any, should be taken in the event of such a conflict. If such a conflict were
to occur, an insurance company participating in the Fund might be required to
redeem the investment of one or more of its separate accounts from the Fund.
This might force the Fund to sell securities at disadvantageous prices.
<PAGE>
T. ROWE PRICE NEW AMERICA GROWTH PORTFOLIO
PROSPECTUS
March 31, 1994
T. Rowe Price
Equity Series, Inc.
TABLE OF CONTENTS
Investment Summary..........................................................21
Investment Objective........................................................22
Fund Characteristics........................................................22
Investment Program..........................................................22
Summary of Fund Fees and Expenses...........................................23
Voting Rights...............................................................23
Investing in the Stock Market...............................................23
Investment Practices........................................................23
Performance Information.....................................................26
Capital Stock...............................................................26
Purchase and Redemption of Shares...........................................27
NAV, Pricing, and Effective Date............................................27
Dividends and Taxation......................................................28
Management of the Fund......................................................28
Expenses and Management Fee.................................................29
Other Insurance Products....................................................29
T. ROWE PRICE LOGO
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INVESTMENT SUMMARY
The Fund's investment objective is long-term growth of capital through
investments primarily in the common stocks of U.S. growth companies which
operate in service industries.
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T. Rowe Price Associates, Inc. (T. Rowe Price) was founded in 1937 by the late
Thomas Rowe Price, Jr. As of December 31, 1993, the firm and its affiliates
managed over $50 billion including more than $5 billion in growth oriented
equity investments, for approximately three million individual and
institutional investor accounts.
This prospectus contains information that a prospective Contract Holder or
Participant should know about the Fund before investing. PLEASE KEEP IT FOR
FUTURE REFERENCE. A Statement of Additional Information for the Fund (dated
March 31, 1994) has been filed with the Securities and Exchange Commission and
is incorporated by reference in this prospectus. It is available at no charge
by contacting your insurance company.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION, OR ANY STATE SECURITIES COMMISSION, PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
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INVESTMENT OBJECTIVE
The Fund's investment objective is long-term growth of capital through
investments primarily in the common stocks of U.S. growth companies which
operate in service industries.
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FUND CHARACTERISTICS
In pursuing its objective, the Fund invests in service companies as well as
non-service related companies whose earnings are believed to hold the prospect
of superior growth. Total return from an investment in the Fund will consist
primarily of capital appreciation (or depreciation), and secondarily of
dividend income.
The Fund's share price will fluctuate with changing market conditions, and
your investment may be worth more or less when redeemed than when purchased.
The Fund should not be relied upon as a complete investment program, nor used
to play short-term swings in the stock market. The Fund cannot guarantee it
will achieve its investment objective.
Shares of the Fund are currently being offered to insurance company separate
accounts 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 are not the shareholders of the
Fund. Rather, the separate account is the shareholder. The variable annuity
and variable life contracts are described in separate prospectuses issued by
the insurance companies. The Fund assumes no responsibility for such
prospectuses or variable annuity or life contracts.
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INVESTMENT PROGRAM
Investing in growth companies
operating in service industries.
In pursuing long-term growth of capital, the Fund will look to invest most of
its assets in service companies that are expected to show superior earnings
growth. This emphasis on growth is based on the premise that companies whose
earnings tend to grow faster than both inflation and the economy will be
rewarded with higher stock prices. Such companies also should be able to raise
their dividends in line with their long-term earnings growth. In addition to
its growth prospects, a company will be judged according to its fundamental
strength and relative valuation of its stock price.
T. Rowe Price believes that service industries, which represent over 50% of
the U.S. economy, will continue to outpace overall economic growth. In
addition, service-oriented companies in general may be more resistant to
economic downturns due to having lower fixed costs, being less capital
intensive, and maintaining smaller physical inventories than manufacturing
companies.
The Fund will invest primarily in common stocks of companies deriving a
majority of their revenues or operating earnings from service-related
activities such as: consumer services (retailing, entertainment and leisure,
restaurants and food distribution), business services (health care,
computers), and financial services (insurance, investment services) and in
companies whose prospects are closely tied to service industries. The Fund may
also invest up to 25% of its assets in non-service related growth companies in
pursuit of capital appreciation.
The Fund seeks to invest in companies that are above-average performers in
their field, without regard to the company's size. Companies in the portfolio
will range from larger "blue chip" firms to small rapidly growing companies.
Smaller companies often have limited product lines, markets, or financial
resources. Their securities may have limited marketability and may be subject
to more volatile price movements than securities of larger companies. On the
other hand, such companies provide the prospect for significant capital
appreciation because of their potential for high earnings growth or because
they may be overlooked by investors and, therefore, undervalued in the
marketplace.
<PAGE>
Although the Fund will invest primarily in U.S. common stocks, it may also
purchase other types of securities, for example, foreign securities,
convertible securities and warrants, when considered consistent with the
Fund's investment objective and program. The Fund may also engage in a variety
of investment management practices, such as buying and selling futures and
options.
Please see INVESTMENT PRACTICES for a more complete description of these and
other permissible Fund investments.
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SUMMARY OF FUND FEES
AND EXPENSES
MANAGEMENT FEE. The Fund pays T. Rowe Price a single, all-inclusive fee of
0.85% of the Fund's average daily net assets to cover investment management
and operating expenses.
VARIABLE ANNUITY AND VARIABLE LIFE CHARGES. Variable annuity and variable life
fees and charges are in addition to those described above and are described in
the variable annuity prospectuses.
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VOTING RIGHTS
The shares of the Fund have equal voting rights. The various insurance
companies own the outstanding shares of the Fund in their separate accounts.
These separate accounts are registered under the Investment Company Act of
1940 or are excluded from registration thereunder. Under current law the
insurance companies must vote the shares held in registered separate accounts
in accordance with voting instructions received from variable Contract Holders
or Participants having the right to give such instructions.
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INVESTING IN THE
STOCK MARKET
Common stocks offer a way to invest for long-term growth of capital. As the
U.S. economy has expanded, corporate profits have grown, and share values have
risen.
Economic growth has been punctuated by periodic declines. Share prices of even
the best managed, most profitable corporations are subject to market risk,
which means their stock prices can decline. In addition, swings in investor
psychology and/or significant trading by large institutional investors can
result in price fluctuations. For this reason, equity investors should have a
long-term investment horizon and be willing to wait out bear markets.
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INVESTMENT PRACTICES
This section takes a detailed look at some of the types of securities the Fund
may hold in its portfolio and the various kinds of investment practices that
may be used in day-to-day portfolio management. The Fund's investment program
is subject to further restrictions and risks described in the Statement of
Additional Information.
Shareholder approval is required to substantively change the Fund's objective
and certain investment restrictions noted in the following section as
"fundamental policies." The managers also follow certain "operating policies"
which can be changed without shareholder approval. However, significant
changes are discussed with shareholders in Fund reports.
<PAGE>
Fund managers have considerable
leeway in choosing investment
strategies and selecting securities
they believe will help the Fund
achieve its objective.
TYPES OF PORTFOLIO SECURITIES
In seeking to meet its investment objective, the Fund may invest in any type
of security whose investment characteristics are consistent with the Fund's
investment program. These and some of the other investment techniques the Fund
may use are described in the following pages.
Fundamental Policy. The Fund will not purchase a security if, as a result,
with respect to 75% of its total assets, more than 5% of its total assets
would be invested in securities of the issuer or more than 10% of the voting
securities of the issuer would be held by the Fund.
COMMON AND PREFERRED STOCKS. Stocks represent shares of ownership in a
company. Generally, preferred stock has a specified dividend and ranks after
bonds and before common stocks in its claim on income for dividend payments
and on assets should the company be liquidated. After other claims are
satisfied, common stockholders participate in company profits on a pro rata
basis; profits may be paid out in dividends or reinvested in the company to
help it grow. Increases and decreases in earnings are usually reflected in a
company's stock price, so common stocks generally have the greatest
appreciation and depreciation potential of all corporate securities. While
most preferred stocks pay a dividend, the Fund may purchase preferred stock
where the issuer has omitted, or is in danger of omitting, payment of its
dividend. Such investments would be made primarily for their capital
appreciation potential.
CONVERTIBLE SECURITIES AND WARRANTS. The Fund may invest in debt or preferred
equity securities convertible into or exchangeable for equity securities.
Traditionally, convertible securities have paid dividends or interest at rates
higher than common stocks but lower than non-convertible securities. They
generally participate in the appreciation or depreciation of the underlying
stock into which they are convertible, but to a lesser degree. In recent
years, convertibles have been developed which combine higher or lower current
income with options and other features. Warrants are options to buy a stated
number of shares of common stock at a specified price any time during the life
of the warrants (generally, two or more years).
FOREIGN SECURITIES. The Fund may invest in foreign securities. These include
non-dollar denominated securities traded outside of the U.S. and dollar
denominated securities traded in the U.S. (such as ADRs). Such investments
increase a portfolio's diversification and may enhance return, but they also
involve some special risks such as exposure to potentially adverse local
political and economic developments; nationalization and exchange controls;
potentially lower liquidity and higher volatility; possible problems arising
from accounting, disclosure, settlement, and regulatory practices that differ
from U.S. standards; and the chance that fluctuations in foreign exchange
rates will decrease the investment's value (favorable changes can increase its
value).
Operating Policy. The Fund may invest up to 10% of its total assets in foreign
securities.
HYBRID INSTRUMENTS. These instruments can combine the characteristics of
securities, futures and options. For example, the principal amount, redemption
or conversion terms of a security could be related to the market price of some
commodity, currency or securities index. Such securities may bear interest or
pay dividends at below market (or even relatively nominal) rates. Under
certain conditions, the redemption value of such an investment could be zero.
Hybrids can have volatile prices and limited liquidity and their use by the
Fund may not be successful.
<PAGE>
Operating Policy. The Fund may invest up to 10% of its total assets in hybrid
instruments.
PRIVATE PLACEMENTS (RESTRICTED SECURITIES). These securities are sold directly
to a small number of investors, usually institutions. Unlike public offerings,
such securities are not registered with the SEC. Although certain of these
securities may be readily sold, for example under Rule 144A, the sale of
others may involve substantial delays and additional costs.
Operating Policy. The Fund will not invest more than 15% of its net assets in
illiquid securities, but not more than 5% in restricted securities (other than
Rule 144A securities).
TYPES OF MANAGEMENT PRACTICES
CASH POSITION. The Fund will hold a certain portion of its assets in money
market securities, including repurchase agreements, in the two highest rating
categories, maturing in one year or less. For temporary, defensive purposes,
the Fund may invest without limitation in such securities. This reserve
position provides flexibility in meeting redemptions, expenses, and the timing
of new investments, and serves as a short-term defense during periods of
unusual market volatility.
BORROWING MONEY AND TRANSFERRING ASSETS. The Fund can borrow money from banks
as a temporary measure for emergency purposes, to facilitate redemption
requests, or for other purposes consistent with the Fund's investment
objective and program. Such borrowings may be collateralized with Fund assets,
subject to restrictions.
Fundamental Policy. Borrowings may not exceed 33 1/3% of total Fund assets.
Operating Policies. The Fund may not transfer as collateral any portfolio
securities except as necessary in connection with permissible borrowings or
investments, and then such transfers may not exceed 33 1/3% of the Fund's
total assets. The Fund may not purchase additional securities when borrowings
exceed 5% of total assets.
FUTURES AND OPTIONS. Futures are often used to manage risk, because they
enable the investor to buy or sell an asset in the future at an agreed upon
price. Options give the investor the right, but not the obligation, to buy or
sell an asset at a predetermined price in the future. The Fund may buy and
sell futures contracts (and options on such contracts) to manage its exposure
to changes in securities prices and foreign currencies and as an efficient
means of adjusting its overall exposure to certain markets. The Fund may
purchase, sell, or write call and put options on securities, financial
indices, and foreign currencies.
Futures contracts and options may not always be successful hedges; their
prices can be highly volatile; using them could lower the Fund's total return;
and the potential loss from the use of futures can exceed the Fund's initial
investment in such contracts.
Operating Policies. Futures: Initial margin deposits and premiums on options
used for non-hedging purposes will not equal more than 5% of the Fund's net
asset value. Options on securities: The total market value of securities
against which the Fund has written call or put options may not exceed 25% of
its total assets. The Fund will not commit more than 5% of its total assets to
premiums when purchasing call or put options.
MANAGING FOREIGN CURRENCY RISK. Investors in foreign securities may "hedge"
their exposure to potentially unfavorable currency changes by purchasing a
contract to exchange one currency for another on some future date at a
specified exchange rate. In certain circumstances, a "proxy currency" may be
substituted for the currency in which the investment is denominated, a
strategy known as "proxy hedging." Although foreign currency transactions will
be used primarily to protect the Fund's foreign securities from adverse
currency movements relative to the dollar, they involve the risk that
anticipated currency movements will not occur and the Fund's total return
could be reduced.
<PAGE>
LENDING OF PORTFOLIO SECURITIES. Like other mutual funds, the Fund may lend
securities to broker-dealers, other institutions, or other persons to earn
additional income. The principal risk is the potential insolvency of the
broker-dealer or other borrower. In this event, the Fund could experience
delays in recovering its securities and possibly capital losses.
Fundamental Policy. The value of loaned securities may not exceed 33 1/3% of
the Fund's total assets.
PORTFOLIO TRANSACTIONS. The Fund will not generally trade in securities for
short-term profits but, when circumstances warrant, securities may be
purchased and sold without regard to the length of time held. The portfolio
turnover rate is not expected to exceed 100%.
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PERFORMANCE INFORMATION
The Fund may advertise total return figures on both a cumulative and compound
average annual basis and compare them to various indices (e.g., S&P 500),
other mutual funds or other performance measures. (The total return of the
Fund will consist primarily of capital appreciation (or depreciation), and
secondarily of dividend income.) Cumulative total return compares the amount
invested at the beginning of a period with the amount redeemed at the end of
the period, assuming the reinvestment of all dividends and capital gain
distributions. The compound average annual total return indicates a yearly
compound average of the Fund's performance, derived from the cumulative total
return. The annual compound rate of return for the Fund may vary from any
average. Further information about the Fund's performance is contained in its
annual report which is available free of charge.
Total returns quoted for the Fund include the effect of deducting the Fund's
expenses, but may not include charges and expenses attributable to any
particular insurance product. Since you can only purchase shares of the Fund
through an insurance product, you should carefully review the prospectus of
the insurance product you have chosen for information on relevant charges and
expenses. Excluding these charges from quotations of the Fund's performance
has the effect of increasing the performance quoted.
- ------------------------------------------------------------------------------
CAPITAL STOCK
T. Rowe Price Equity Series, Inc. is a Maryland corporation organized in 1994
and registered with the Securities and Exchange Commission under the
Investment Company Act of 1940 as a diversified, open-end investment company,
commonly known as a "mutual fund." A mutual fund, such as the Fund, enables
shareholders to: (1) obtain professional management of investments, including
T. Rowe Price's proprietary research; (2) diversify their portfolio to a
greater degree than would be generally possible if they were investing as
individuals and thereby reduce, but not eliminate risks; and (3) simplify the
recordkeeping and reduce transaction costs associated with investments.
<PAGE>
Currently, the Corporation consists of two series, each representing a
separate class of shares having different objectives and investment policies.
The two series are the New America Growth Portfolio and the Equity Income
Portfolio, both established in 1994. T. Rowe Price Equity Income Portfolio is
described in a separate prospectus. The Corporation's charter provides that
the Board of Directors may issue additional series of shares and/or additional
classes of shares for each series. Although each Fund is offering only its own
shares, it is possible that a Fund might become liable for any misstatement in
the prospectus about another Fund. The Fund's Board has considered this factor
in approving the use of two prospectuses.
The Fund has an Investment Advisory Committee composed of the following
members: John H. Laporte, Chairman, Brian W. H. Berghuis and John F. Wakeman.
The Committee Chairman has day-to-day responsibility for managing the Fund and
works with the Committee in developing and executing the Fund's investment
program. Mr. Laporte has been Chairman of the Committee since its inception in
1994. He joined T. Rowe Price in 1976 and has been managing investments since
1984.
SHAREHOLDER RIGHTS. The Fund issues one class of capital stock, all shares of
which have equal rights with regard to voting, redemptions, dividends,
distributions, and liquidations. Fractional shares have voting rights and
participate in any distributions and dividends. Shareholders have no
preemptive or conversion rights; nor do they have cumulative voting rights.
When the Fund's shares are issued, they are fully paid and nonassessable. The
Fund does not routinely hold annual meetings of shareholders. However, if
shareholders representing at least 10% of all votes of the Fund entitled to be
cast so desire, they may call a special meeting of shareholders of the Fund
for the purpose of voting on the question of the removal of any director(s).
The total authorized capital stock of the Fund consists of 1,000,000,000
shares, each having a par value of $.0001. As of the date of this prospectus,
T. Rowe Price owned 10,000 shares of the Fund which represented all of the
Fund's outstanding shares. As of February 28, 1994, there were 3,272,854
shareholders in the other 55 T. Rowe Price Funds.
- ------------------------------------------------------------------------------
PURCHASE AND REDEMPTION
OF SHARES
For instructions on how to purchase and redeem shares of the Fund, read the
separate account prospectus.
Shares of the Fund are sold and redeemed without the imposition of any sales
commission or redemption charge. However, certain deferred sales charges and
other charges may apply to the annuity contract. Those charges are disclosed
in the separate account prospectus.
- ------------------------------------------------------------------------------
NAV, PRICING, AND
EFFECTIVE DATE
NET ASSET VALUE PER SHARE (NAV). The NAV per share, or share price, for the
Fund is normally determined as of 4:00 pm Eastern Time (ET) each day the New
York Stock Exchange is open. The Fund's share price is calculated by
subtracting its liabilities from its total assets and dividing the result by
the total number of shares outstanding. Among other things, the Fund's
liabilities include accrued expenses and dividends payable, and its total
assets include portfolio securities valued at market as well as income accrued
but not yet received.
PURCHASES. The insurance companies purchase shares of the Fund for separate
accounts, using premiums allocated by the Contract Holders or Participants.
Shares are purchased at the NAV next determined after the insurance company
receives the premium payment in acceptable form. Initial and subsequent
payments allocated to the Fund are subject to the limits stated in the
separate account prospectus issued by the insurance company.
<PAGE>
REDEMPTIONS. The insurance companies redeem shares of the Fund to make benefit
or surrender payments under the terms of its Contracts. Redemptions are
processed on any day on which the New York Stock Exchange is open and are
priced at the Fund's NAV next determined after the insurance company receives
a surrender request in acceptable form.
PROCEEDS. Payment for redeemed shares will be made promptly, but in no event
later than seven days. However, the right of redemption may be suspended or
the date of payment postponed in accordance with the Investment Company Act of
1940. The amount received upon redemption of the shares of the Fund may be
more or less than the amount paid for the shares, depending on the
fluctuations in the market value of the assets owned by the Fund.
The Fund reserves the right to change the time at which purchases,
redemptions, and exchanges are priced if the New York Stock Exchange closes at
a time other than 4:00 pm ET or an emergency exists.
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DIVIDENDS AND TAXATION
For a discussion of the tax status of your variable annuity contract, refer to
the prospectus of your insurance company's separate account.
DIVIDENDS AND DISTRIBUTIONS. The policy of the Fund is to distribute all of
its net investment income and net capital gains each year to its shareholders,
which are the separate accounts established by the various insurance companies
in connection with their issuance of variable annuity and life contracts. All
Fund distributions made to a separate account will be reinvested automatically
in additional Fund shares, unless a shareholder (separate account) elects to
receive distributions in cash. Under current law, dividends and distributions
made by the Fund to separate accounts, generally, are not taxable to the
separate accounts, the insurance company or the Contract Holder, provided that
the separate account meets the diversification requirements of Section 817(h)
of the Internal Revenue Code of 1986, as amended, and other tax related
requirements are satisfied. The Fund intends to diversify its investments in
the manner required under Code Section 817(h).
FOREIGN TRANSACTIONS. If the Fund pays nonrefundable taxes to foreign
governments during the year, the taxes will reduce the Fund's dividends.
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MANAGEMENT OF THE FUND
INVESTMENT MANAGER. T. Rowe Price is responsible for selection and management
of the Fund's portfolio investments. T. Rowe Price serves as investment
manager to a variety of individual and institutional investors, including
limited and real estate partnerships and other mutual funds.
BOARD OF DIRECTORS. The management of the Fund's business and affairs is the
responsibility of the Fund's Board of Directors.
PORTFOLIO TRANSACTIONS. Decisions with respect to the purchase and sale of the
Fund's portfolio securities are made by T. Rowe Price. The Fund's Board of
Directors has authorized T. Rowe Price to utilize certain brokers indirectly
related to T. Rowe Price in the capacity of broker in connection with the
execution of the Fund's portfolio transactions.
<PAGE>
INVESTMENT SERVICES. T. Rowe Price Investment Services, Inc., a wholly-owned
subsidiary of T. Rowe Price, is the distributor for this Fund as well as all
other T. Rowe Price Funds.
TRANSFER AND DIVIDEND DISBURSING AGENT, SHAREHOLDER SERVICING AND
ADMINISTRATIVE. TRP Services, a wholly-owned subsidiary of T. Rowe Price,
serves the Fund as transfer and dividend disbursing agent. T. Rowe Price
calculates the daily share price and maintains the portfolio and general
accounting records of the Fund. The address for TRP Services is 100 East Pratt
Street, Baltimore, Maryland 21202.
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EXPENSES AND MANAGEMENT
FEE
Under the management agreement, all expenses of the Fund will be paid by T.
Rowe Price, except interest, taxes, brokerage commissions, directors' fees and
expenses (including counsel fees and expenses) and extraordinary expenses. The
Board of Directors of the Fund reserves the right to impose additional fees
against shareholder accounts to defray expenses which would otherwise be paid
by T. Rowe Price under the management agreement. The Board does not anticipate
levying such charges; such a fee, if charged, may be retained by the Fund or
paid to T. Rowe Price.
MANAGEMENT FEE. The Fund pays T. Rowe Price an annual all-inclusive fee of
0.85% based on its average daily net assets. The Fund calculates and accrues
the fee daily. This fee pays for investment management services and other
operating costs.
- ------------------------------------------------------------------------------
OTHER INSURANCE PRODUCTS
The Fund may serve as an investment medium for both variable annuity contracts
and variable life insurance policies. Shares of the Fund may be offered to
separate accounts established by any number of insurance companies. The Fund
currently does not foresee any disadvantages to variable annuity contract
owners due to the fact that the Fund may serve as an investment medium for
both variable life insurance policies and annuity contracts; however, due to
differences in tax treatment or other considerations, it is theoretically
possible that the interests of owners of annuity contracts and insurance
policies for which the Fund serves as an investment medium might at some time
be in conflict. However, the Fund's Board of Directors is required to monitor
events to identify any material conflicts between variable annuity contract
owners and variable life policy owners, and will determine what action, if
any, should be taken in the event of such a conflict. If such a conflict were
to occur, an insurance company participating in the Fund might be required to
redeem the investment of one or more of its separate accounts from the Fund.
This might force the Fund to sell securities at disadvantageous prices.
The Statement of Additional Information for the T. Rowe Price New America
Growth Portfolio, dated March 31, 1994, should be inserted here.
PAGE 1
STATEMENT OF ADDITIONAL INFORMATION
T. Rowe Price Equity Series, Inc. (the "Corporation")
T. Rowe Price New America Growth Portfolio
(the "Fund")
Shares of the Fund may be offered to insurance company separate
accounts 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 are not the shareholders of the
Fund. Rather, the separate account is the shareholder. The variable annuity
and variable life contracts are described in separate prospectuses issued by
the insurance companies. The Fund assumes no responsibility for such
prospectuses, or variable annuity or life contracts.
In the future, it is possible that the Fund may offer its 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 Fund's prospectus dated March 31, 1994, which
may be obtained from T. Rowe Price Investment Services, Inc., 100 East Pratt
Street, Baltimore, Maryland 21202.
The date of this Statement of Additional Information is March 31, 1994.
PAGE 2
TABLE OF CONTENTS
Page Page
Capital Stock. . . . . . . . . . . Investment Performance. . . . . . .
Custodian. . . . . . . . . . . . . Investment Program. . . . . . . . .
Distributor for Fund . . . . . . . Investment Restrictions . . . . . .
Dividends. . . . . . . . . . . . . Legal Counsel . . . . . . . . . . .
Federal and State Registration . Lending of Portfolio
of Shares . . . . . . . . . . . . Securities . . . . . . . . . . . .
Foreign Currency Transactions. . . Management of Fund. . . . . . . . .
Foreign Futures and Options. . . . Net Asset Value Per Share . . . . .
Foreign Securities . . . . . . . . Options . . . . . . . . . . . . . .
Futures Contracts. . . . . . . . . Portfolio Transactions. . . . . . .
Independent Accountants. . . . . . Pricing of Securities . . . . . . .
Investment Management . Principal Holders of
Services. . . . . . . . . . . . . Securities . . . . . . . . . . . .
Investment Objective and Repurchase Agreements . . . . . . . .
Program . . . . . . . . . . . . . Risk Factors. . . . . . . . . . . .
Investment Objective and Tax Status. . . . . . . . . . . . .
Policies. . . . . . . . . . . . . The Service Economy . . . . . . . .
INVESTMENT OBJECTIVE AND POLICIES
The following information supplements the discussion of the Fund's
investment objective and policies discussed in the Fund's prospectus. Unless
otherwise specified, the investment program and restrictions of the Fund are
not fundamental policies. The operating policies of the Fund are subject to
change by its Board of Directors without shareholder approval. However,
shareholders will be notified of a material change in an operating policy.
The fundamental policies of the Fund may not be changed without the approval
of at least a majority of the outstanding shares of the Fund or, if it is
less, 67% of the shares represented at a meeting of shareholders at which the
holders of 50% or more of the shares are represented.
INVESTMENT OBJECTIVE AND PROGRAM
The Fund's investment objective is long-term growth of capital through
investments primarily in the common stocks of U.S. growth companies which
operate in service industries. The Fund's investment objective is based on
the premise that long-term growth in the service sector will outpace overall
economic growth.
The Fund's share price will fluctuate with changing market conditions,
and your investment may be worth more or less when redeemed than when
purchased. The Fund should not be relied upon as a complete investment
program, nor used to play short-term swings in the stock market. In addition,
stocks of small companies may be subject to more abrupt or erratic price
movements than larger company securities. The Fund cannot guarantee it will
achieve its investment objective.
PAGE 3
RISK FACTORS
General
Because of its investment policy, the Fund may or may not be suitable
or appropriate for all investors. The Fund is not a money market fund and is
not an appropriate investment for those whose primary objective is principal
stability. The Fund will normally have most of its assets in equity
securities (e.g., common stocks). This portion of the Fund's assets will be
subject to all of the risks of investing in the stock market. There is risk
in all investment. The value of the portfolio securities of the Fund will
fluctuate based upon market conditions. Although the Fund seeks to reduce
risk by investing in a diversified portfolio, such diversification does not
eliminate all risk. There can, of course, be no assurance that the Fund will
achieve these results. 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 Fund.
Foreign Securities
Because the Fund may invest in foreign securities, investment in the
Fund involves risks that are different in some respects from an investment in
a fund which invests only in securities of U.S. domestic issuers. Foreign
investments may be affected favorably or unfavorably by changes in currency
rates and exchange control regulations. There may be less publicly available
information about a foreign company than about a U.S. company, and foreign
companies may not be subject to accounting, auditing, and financial reporting
standards and requirements comparable to those applicable to U.S. companies.
There may be less governmental supervision of securities markets, brokers and
issuers of securities. Securities of some foreign companies are less liquid
or more volatile than securities of U.S. companies, and foreign brokerage
commissions and custodian fees are generally higher than in the United States.
Settlement practices may include delays and may differ from those customary in
United States markets. Investments in foreign securities may also be subject
to other risks different from those affecting U.S. investments, including
local political or economic developments, expropriation or nationalization of
assets, restrictions on foreign investment and repatriation of capital,
imposition of withholding taxes on dividend or interest payments, currency
blockage (which would prevent cash from being brought back to the United
States), and difficulty in enforcing legal rights outside the U.S.
INVESTMENT PROGRAM
In addition to the investments described in the Fund's prospectus, the
Fund may invest in the following:
Type of Securities
Hybrid Instruments
Hybrid Instruments have recently been developed and combine the
elements of futures contracts or options with those of debt, preferred equity
or a depository instrument (hereinafter "Hybrid Instruments"). Often these
Hybrid Instruments are indexed to the price of a commodity, particular
PAGE 4
currency, or a domestic or foreign debt or equity securities index. 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.
The risks of investing in Hybrid Instruments reflect a combination of
the risks from investing in securities, options, futures and currencies,
including volatility and lack of liquidity. Reference is made to the
discussion of futures, options, and forward contracts herein for a discussion
of these risks. Further, the prices of the Hybrid Instrument and the related
commodity or currency may not move in the same direction or at the same time.
Hybrid Instruments may bear interest or pay preferred dividends at below
market (or even relatively nominal) rates. Alternatively, Hybrid Instruments
may bear interest at above market rates but bear an increased risk of
principal loss (or gain). In addition, because the purchase and sale of
Hybrid Instruments could take place in an over-the-counter market or in a
private transaction between the Fund and the seller of the Hybrid Instrument,
the creditworthiness of the contra party to the transaction would be a risk
factor which the Fund would have to consider. Hybrid Instruments also may not
be subject to regulation of the 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.
Illiquid or Restricted Securities
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 are
invested in illiquid assets, including restricted securities, the Fund will
take appropriate steps to protect liquidity.
Notwithstanding the above, the Fund may purchase securities which,
while privately placed, are eligible for purchase and sale under Rule 144A
under the 1933 Act. This rule permits certain qualified institutional buyers,
such as the Fund, to trade in privately placed securities even though such
securities are not registered under the 1933 Act. T. Rowe Price under the
supervision of the Fund's Board of Directors, will consider whether securities
purchased under Rule 144A are illiquid and thus subject to the Fund's
restriction of investing no more than 15% of its assets in illiquid
securities. A determination of whether a Rule 144A security is liquid or not
is a question of fact. In making this determination, T. Rowe Price will
PAGE 5
consider the trading markets for the specific security taking into account the
unregistered nature of a Rule 144A security. In addition, T. Rowe Price could
consider the (1) frequency of trades and quotes, (2) number of dealers and
potential purchases, (3) dealer undertakings to make a market, and (4) the
nature of the security and of marketplace trades (e.g., the time needed to
dispose of the security, the method of soliciting offers and the mechanics of
transfer). The liquidity of Rule 144A securities would be monitored, and if
as a result of changed conditions it is determined that a Rule 144A security
is no longer liquid, the Fund's holdings of illiquid securities would be
reviewed to determine what, if any, steps are required to assure that the Fund
does not invest more than 15% of its assets in illiquid securities. Investing
in Rule 144A securities could have the effect of increasing the amount of the
Fund's assets invested in illiquid securities if qualified institutional
buyers are unwilling to purchase such securities.
Warrants
The Fund may invest in 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 the Fund may invest in these
securities.
PORTFOLIO MANAGEMENT PRACTICES
Lending of Portfolio Securities
For the purpose of realizing additional income, the Fund may make
secured loans of portfolio securities amounting to not more than 33 1/3% of
its total assets. This policy is a fundamental policy. 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
PAGE 6
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 T. Rowe Price to be
of good standing and will not be made unless, in the judgment of T. Rowe
Price, the consideration to be earned from such loans would justify the risk.
Other Lending/Borrowing
Subject to approval by the Securities and Exchange Commission 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"). The Fund has no current intention of engaging
in these practices at this time.
Repurchase Agreements
The 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 T.
Rowe Price's approved list and have a credit rating with respect to its short-
term debt of at least A1 by Standard & Poor's Ratings Group, P1 by Moody's
Investors Service, or the equivalent rating by T. Rowe Price. At that time,
the bank or securities dealer agrees to repurchase the underlying security at
the same price, plus specified interest. Repurchase agreements are generally
for a short period of time, often less than a week. 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.
Options
Writing Covered Call Options
The Fund may write (sell) "covered" call options and purchase options
to close out options previously written by a 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 T.
Rowe Price'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.
PAGE 7
A call option gives the holder (buyer) the "right to purchase" a
security or currency at a specified price (the exercise price) at expiration
of the option (European style) or at any time until a certain date (the
expiration date) (American style). So long as the obligation of the writer of
a call option continues, he may be assigned an exercise notice by the broker-
dealer through whom such option was sold, requiring him to deliver the
underlying security or currency against payment of the exercise price. This
obligation terminates upon the expiration of the call option, or such earlier
time at which the writer effects a closing purchase transaction by
repurchasing an option identical to that previously sold. To secure his
obligation to deliver the underlying security or currency in the case of a
call option, a writer is required to deposit in escrow the underlying security
or currency or other assets in accordance with the rules of a clearing
corporation. The Fund will write only covered call options. This means that
the Fund will own the security or currency subject to the option or an option
to purchase the same underlying security or currency, having an exercise price
equal to or less than the exercise price of the "covered" option, or will
establish and maintain with its custodian for the term of the option, an
account consisting of cash, U.S. government securities or other liquid high-
grade debt obligations having a value equal to the fluctuating market value of
the optioned securities or currencies. In order to comply with the
requirements of several states, the Fund will not write a covered call option
if, as a result, the aggregate market value of all portfolio securities or
currencies covering call or put options exceeds 25% of the market value of the
Fund's net assets. Should these state laws change or should the Fund obtain a
waiver of 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.
Portfolio securities or currencies on which call options may be written
will be purchased solely on the basis of investment considerations consistent
with the Fund's investment 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, a 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
PAGE 8
volatility of the underlying security or currency, and the length of the
option period. Once the decision to write a call option has been made, T.
Rowe Price, in determining whether a particular call option should be written
on a particular security or currency, will consider the reasonableness of the
anticipated premium and the likelihood that a liquid secondary market will
exist for those options. The premium received by the Fund for writing covered
call options will be recorded as a liability of the Fund. This liability will
be adjusted daily to the option's current market value, which will be the
latest sale price at the time at which the net asset value per share of the
Fund is computed (close of the New York Stock Exchange), or, in the absence of
such sale, the latest asked price. The option will be terminated upon
expiration of the option, the purchase of an identical option in a closing
transaction, or delivery of the underlying security or currency upon the
exercise of the option.
Closing transactions will be effected in order to realize a profit on
an outstanding call option, to prevent an underlying security or currency from
being called, or, to permit the sale of the underlying security or currency.
Furthermore, effecting a closing transaction will permit the Fund to write
another call option on the underlying security or currency with either a
different exercise price or expiration date or both. If the Fund desires to
sell a particular security or currency from its portfolio on which it has
written a call option, or purchased a put option, it will seek to effect a
closing transaction prior to, or concurrently with, the sale of the security
or currency. There is, of course, no assurance that the Fund will be able to
effect such closing transactions at 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. The Fund will pay transaction costs in connection with the
writing of options to close out previously written options. Such transaction
costs are normally higher than those applicable to purchases and sales of
portfolio securities.
Call options written by the Fund will normally have expiration dates of
less than nine months from the date written. The exercise price of the
options may be below, equal to, or above the current market values of the
underlying securities or currencies at the time the options are written. From
time to time, the Fund may purchase an underlying security or currency for
delivery in accordance with an exercise notice of a call option assigned to
it, rather than delivering such security or currency from its portfolio. In
such cases, additional costs may be incurred.
The Fund will realize a profit or loss from a closing purchase
transaction if the cost of the transaction is less or more than the premium
received from the writing of the option. Because increases in the market
price of a call option will generally reflect increases in the market price of
the underlying security or currency, any loss resulting from the repurchase of
a call option is likely to be offset in whole or in part by appreciation of
the underlying security or currency owned by the Fund.
PAGE 9
Writing Covered Put Options
The Fund may write American or European style covered put options and
purchase options to close out options previously written by the Fund. A put
option gives the purchaser of the option the right to sell, and the writer
(seller) has the obligation to buy, the underlying security or currency at the
exercise price during the option period (American style) or at the expiration
of the option (European style). So long as the obligation of the writer
continues, he may be assigned an exercise notice by the broker-dealer through
whom such option was sold, requiring him to make payment of the exercise price
against delivery of the underlying security or currency. The operation of put
options in other respects, including their related risks and rewards, is
substantially identical to that of call options.
The Fund would write put options only on a covered basis, which means
that the Fund would maintain in a segregated account cash, U.S. government
securities or other liquid high-grade debt obligations in an amount not less
than the exercise price or the Fund will own an option to sell the underlying
security or currency subject to the option having an exercise price equal to
or greater than the exercise price of the "covered" option at all times while
the put option is outstanding. (The rules of a clearing corporation currently
require that such assets be deposited in escrow to secure payment of the
exercise price.) The Fund would generally write covered put options in
circumstances where T. Rowe Price wishes to purchase the underlying security
or currency for the Fund's portfolio at a price lower than the current market
price of the security or currency. In such event the Fund would write a put
option at an exercise price which, reduced by the premium received on the
option, reflects the lower price it is willing to pay. Since the 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.
Purchasing Put Options
The Fund may purchase American or European style put options. As the
holder of a put option, the Fund has the right to sell the underlying security
or currency at the exercise price at any time during the option period
(American style) or at the expiration of the option (European style). The
Fund may enter into closing sale transactions with respect to such options,
exercise them or permit them to expire. The Fund may purchase put options for
defensive purposes in order to protect against an anticipated decline in the
PAGE 10
value of its securities or currencies. An example of such use of put options
is provided below.
The Fund may purchase a put option on an underlying security or
currency (a "protective put") owned by the Fund as a defensive technique in
order to protect against an anticipated decline in the value of the security
or currency. Such hedge protection is provided only during the life of the
put option when the Fund, as the holder of the put option, is able to sell the
underlying security or currency at the put exercise price regardless of any
decline in the underlying security's market price or currency's exchange
value. For example, a put option may be purchased in order to protect
unrealized appreciation of a security or currency where T. Rowe Price deems it
desirable to continue to hold the security or currency because of tax
considerations. The premium paid for the put option and any transaction costs
would reduce any capital gain otherwise available for distribution when the
security or currency is eventually sold.
The Fund may also purchase put options at a time when the Fund does not
own the underlying security or currency. By purchasing put options on a
security or currency it does not own, the Fund seeks to benefit from a decline
in the market price of the underlying security or currency. If the put option
is not sold when it has remaining value, and if the market price of the
underlying security or currency remains equal to or greater than the exercise
price during the life of the put option, the Fund will lose its entire
investment in the put option. In order for the purchase of a put option to be
profitable, the market price of the underlying security or currency must
decline sufficiently below the exercise price to cover the premium and
transaction costs, unless the put option is sold in a closing sale
transaction.
To the extent required by the laws of certain states, the Fund may not
be permitted to commit more than 5% of its assets to premiums when purchasing
put and call options. Should these state laws change or should the Fund
obtain a waiver of 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.
Purchasing Call Options
The 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.
PAGE 11
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, the Fund may commit more than 5% of its
assets to premiums when purchasing call and put options. The Fund may also
purchase call options on underlying securities or currencies it owns in order
to protect unrealized gains on call options previously written by it. A call
option would be purchased for this purpose where tax considerations make it
inadvisable to realize such gains through a closing purchase transaction.
Call options may also be purchased at times to avoid realizing losses.
Dealer (Over-the-Counter) Options
The Fund may engage in transactions involving dealer options. Certain
risks are specific to dealer options. While the Fund would look to a clearing
corporation to exercise exchange-traded options, if the Fund were to purchase
a dealer option, it would rely on the dealer from whom it purchased the option
to perform if the option were exercised. Failure by the dealer to do so would
result in the loss of the premium paid by the Fund as well as loss of the
expected benefit of the transaction.
Exchange-traded options generally have a continuous liquid market while
dealer options have none. Consequently, the Fund will generally be able to
realize the value of a dealer option it has purchased only by exercising it or
reselling it to the dealer who issued it. Similarly, when the Fund writes a
dealer option, it generally will be able to close out the option prior to its
expiration only by entering into a closing purchase transaction with the
dealer to which the Fund originally wrote the option. While the Fund will
seek to enter into dealer options only with dealers who will agree to and
which are expected to be capable of entering into closing transactions with
the Fund, there can be no assurance that the Fund will be able to liquidate a
dealer option at a favorable price at any time prior to expiration. Until the
Fund, as a covered dealer call option writer, is able to effect a closing
purchase transaction, it will not be able to liquidate securities (or other
assets) 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
the Fund. For example, since the Fund must maintain a secured position with
respect to any call option on a security it writes, the Fund may not sell the
assets which it has segregated to secure the position while it is obligated
PAGE 12
under the option. This requirement may impair a 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 unmarketable securities. If the SEC changes its position
on the liquidity of dealer options, the Fund will change its treatment of such
instrument accordingly.
Futures Contracts
Transactions in Futures
The Fund may enter into futures contracts, including stock index,
interest rate and currency futures ("futures or futures contracts").
Stock index futures contracts may be used to provide a hedge for a
portion of the Fund's portfolio, as a cash management tool, or as an efficient
way for T. Rowe Price to implement either an increase or decrease in portfolio
market exposure in response to changing market conditions. 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 Commodity Futures
Trading Commission ("CFTC"). Futures are traded in London, at the London
International Financial Futures Exchange, in Paris, at the MATIF, and in
Tokyo, at the Tokyo Stock Exchange. Although techniques other than the sale
and purchase of futures contracts could be used for the above-referenced
purposes, futures contracts offer an effective and relatively low cost means
of implementing the Fund's objectives in these areas.
PAGE 13
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 a Fund's assets to
cover or identified accounts could impede portfolio management or the fund's
ability to meet redemption requests or other current obligations.
If the CFTC or other regulatory authorities adopt different (including
less stringent) or additional restrictions, the Fund would comply with such
new restrictions.
Trading in Futures Contracts
A futures contract provides for the future sale by one party and
purchase by another party of a specified amount of a specific financial
instrument (e.g., units of a stock index) for a specified price, date, time
and place designated at the time the contract is made. Brokerage fees are
incurred when a futures contract is bought or sold and margin deposits must be
maintained. Entering into a contract to buy is commonly referred to as buying
or purchasing a contract or holding a long position. Entering into a contract
to sell is commonly referred to as selling a contract or holding a short
position.
PAGE 14
Unlike when the Fund purchases or sells a security, no price would be
paid or received by the Fund upon the purchase or sale of a futures contract.
Upon entering into a futures contract, and to maintain the Fund's open
positions in futures contracts, the Fund would be required to deposit with its
custodian in a segregated account in the name of the futures broker an amount
of cash, U.S. government securities, suitable money market instruments, or
liquid, high-grade debt securities, known as "initial margin." The margin
required for a particular futures contract is set by the exchange on which the
contract is traded, and may be significantly modified from time to time by the
exchange during the term of the contract. Futures contracts are customarily
purchased and sold on margins that may range upward from less than 5% of the
value of the contract being traded.
If the price of an open futures contract changes (by increase in the
case of a sale or by decrease in the case of a purchase) so that the loss on
the futures contract reaches a point at which the margin on deposit does not
satisfy margin requirements, the broker will require an increase in the
margin. However, if the value of a position increases because of favorable
price changes in the futures contract so that the margin deposit exceeds the
required margin, the broker will pay the excess to the Fund.
These subsequent payments, called "variation margin," to and from the
futures broker, are made on a daily basis as the price of the underlying
assets fluctuate making the long and short positions in the futures contract
more or less valuable, a process known as "marking to the market." The Fund
expects to earn interest income on its margin deposits.
Although certain futures contracts, by their terms, require actual
future delivery of and payment for the underlying instruments, in practice
most futures contracts are usually closed out before the delivery date.
Closing out an open futures contract purchase or sale is effected by entering
into an offsetting futures contract 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 the Fund will be able to enter into an offsetting transaction
with respect to a particular futures contract at a particular time. If the
Fund is not able to enter into an offsetting transaction, the Fund will
continue to be required to maintain the margin deposits on the futures
contract.
For example, the Standard & Poor's 500 Stock Index is composed of 500
selected common stocks, most of which are listed on the New York Stock
Exchange. The S&P 500 Index assigns relative weightings to the common stocks
included in the Index, and the Index fluctuates with changes in the market
values of those common stocks. In the case of the S&P 500 Index, contracts
are to buy or sell 500 units. Thus, if the value of the S&P 500 Index were
$150, one contract would be worth $75,000 (500 units x $150). The stock index
futures contract specifies that no delivery of the actual stock making up the
index will take place. Instead, settlement in cash occurs. Over the life of
the contract, the gain or loss realized by the Fund will equal the difference
between the purchase (or sale) price of the contract and the price at which
the contract is terminated. For example, if the Fund enters into a futures
PAGE 15
contract to buy 500 units of the S&P 500 Index at a specified future date at a
contract price of $150 and the S&P 500 Index is at $154 on that future date,
the Fund will gain $2,000 (500 units x gain of $4). If the Fund enters into a
futures contract to sell 500 units of the stock index at a specified future
date at a contract price of $150 and the S&P 500 Index is at $152 on that
future date, the Fund will lose $1,000 (500 units x loss of $2).
Special Risks of Transactions in Futures Contracts
Volatility and Leverage. The prices of futures contracts are volatile
and are influenced, among other things, by actual and anticipated changes in
the market and interest rates, which in turn are affected by fiscal and
monetary policies and national and international 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 the Fund would
realize a loss or a gain.
PAGE 16
Futures contracts may be closed out only on the exchange or board of
trade where the contracts were initially traded. Although the Fund intends to
purchase or sell futures contracts only on exchanges or boards of trade where
there appears to be an active market, there is no assurance that a liquid
market on an exchange or board of trade will exist for any particular contract
at any particular time. In such event, it might not be possible to close a
futures contract, and in the event of adverse price movements, the Fund would
continue to be required to make daily cash payments of variation margin.
However, in the event futures contracts have been used to hedge the underlying
instruments, the Fund would continue to hold the underlying instruments
subject to the hedge until the futures contracts could be terminated. In such
circumstances, an increase in the price of underlying instruments, if any,
might partially or completely offset losses on the futures contract. However,
as described below, there is no guarantee that the price of the underlying
instruments will, in fact, correlate with the price movements in the futures
contract and thus provide an offset to losses on a futures contract.
Hedging Risk. A decision of whether, when, and how to hedge involves
skill and judgment, and even a well-conceived hedge may be unsuccessful to
some degree because of unexpected market behavior, market or interest rate
trends. There are several risks in connection with the use by the Fund of
futures contracts as a hedging device. One risk arises because of the
imperfect correlation between movements in the prices of the futures contracts
and movements in the prices of the underlying instruments which are the
subject of the hedge. T. Rowe Price will, however, attempt to reduce this
risk by entering into futures contracts whose movements, in its judgment, will
have a significant correlation with movements in the prices of the Fund's
underlying instruments sought to be hedged.
Successful use of futures contracts by the Fund for hedging purposes is
also subject to T. Rowe Price's ability to correctly predict movements in the
direction of the market. It is possible that, when the Fund has sold futures
to hedge its portfolio against a decline in the market, the index, indices, or
instruments underlying futures might advance and the value of the underlying
instruments held in the Fund's portfolio might decline. If this were to
occur, the Fund would lose money on the futures and also would experience a
decline in value in its underlying instruments. However, while this might
occur to a certain degree, T. Rowe Price believes that over time the value of
the Fund's portfolio will tend to move in the same direction as the market
indices 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
PAGE 17
participants in the futures market are subject to margin deposit and
maintenance requirements. Rather than meeting additional margin deposit
requirements, investors might close futures contracts through offsetting
transactions, which could distort the normal relationship between the
underlying instruments and futures markets. Second, the margin requirements
in the futures market are less onerous than margin requirements in the
securities markets, and as a result the futures market might attract more
speculators than the securities markets do. Increased participation by
speculators in the futures market might also cause temporary price
distortions. Due to the possibility of price distortion in the futures market
and also because of the imperfect correlation between price movements in the
underlying instruments and movements in the prices of futures contracts, even
a correct forecast of general market trends by T. Rowe Price might not result
in a successful hedging transaction over a very short time period.
Options on Futures Contracts
The Fund 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
stock index futures, the Fund may write or purchase call and put options on
stock indices. Such options would be used in a manner similar to the use of
options on futures contracts. From time to time, a single order to purchase
or sell futures contracts (or options thereon) may be made on behalf of the
Fund and other T. Rowe Price Funds. Such aggregated orders would be allocated
among the 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
PAGE 18
may be imposed with respect to particular classes or series of options, or
underlying instruments; (iv) unusual or unforeseen circumstances may interrupt
normal operations on an exchange; (v) the facilities of an exchange or a
clearing corporation may not at all times be adequate to handle current
trading volume; or (vi) one or more exchanges could, for economic or other
reasons, decide or be compelled at some future date to discontinue the trading
of options (or a particular class or series of options), in which event the
secondary market on that exchange (or in the class or series of options) would
cease to exist, although outstanding options on the exchange that had been
issued by a clearing corporation as a result of trades on that exchange would
continue to be exercisable in accordance with their terms. There is no
assurance that higher than anticipated trading activity or other unforeseen
events might not, at times, render certain of the facilities of any of the
clearing corporations inadequate, and thereby result in the institution by an
exchange of special procedures which may interfere with the timely execution
of customers' orders.
Additional Futures and Options Contracts
Although the Fund has no current intention of engaging in futures or
options transactions other than those described above, it reserves 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 Currency Transactions
A forward foreign currency contract ("forward 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 its customers. A forward
contract generally has no deposit requirement, and no commissions are charged
at any stage for trades.
The 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 T. Rowe Price 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
PAGE 19
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, T. Rowe Price believes that it is important to have the flexibility
to enter into such forward contracts when it determines that the best
interests of the Fund will be served.
The Fund may enter into forward contacts for any other purpose
consistent with the 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 T. Rowe Price. It also should be realized that this method of hedging
PAGE 20
against a decline in the value of a currency does not eliminate fluctuations
in the underlying prices of the securities. It simply establishes a rate of
exchange at a future date. Additionally, although such contracts tend to
minimize the risk of loss due to a decline in the value of the hedged
currency, at the same time, they tend to limit any potential gain which might
result from an increase in the value of that currency.
Although the Fund values its assets daily in terms of U.S. dollars, it
does not intend to convert its holdings of foreign currencies into U.S.
dollars on a daily basis. It will do so from time to time, and investors
should be aware of the costs of currency conversion. Although foreign
exchange dealers do not charge a fee for conversion, they do realize a profit
based on the difference (the "spread") between the prices at which they are
buying and selling various currencies. Thus, a dealer may offer to sell a
foreign currency to the Fund at one rate, while offering a lesser rate of
exchange should the Fund desire to resell that currency to the dealer.
Federal Tax Treatment of Options, Futures Contracts and Forward Foreign
Exchange Contracts
The Fund may enter into certain option, futures, and forward foreign
exchange contracts, including options and futures on currencies, which will be
treated as Section 1256 contracts or straddles.
Transactions which are considered Section 1256 contracts will be
considered to have been closed at the end of the Fund's fiscal year and any
gains or losses will be recognized for tax purposes at that time. Such gains
or losses from the normal closing or settlement of such transactions will be
characterized as 60% long-term capital gain or loss and 40% short-term capital
gain or loss regardless of the holding period of the instrument. The Fund
will be required to distribute net gains on such transactions to shareholders
even though it may not have closed the transaction and received cash to pay
such distributions.
Options, futures and forward foreign exchange contracts, including
options and futures on currencies, which offset a foreign dollar denominated
bond or currency position may be considered straddles for tax purposes, in
which case a loss on any position in a straddle will be subject to deferral to
the extent of unrealized gain in an offsetting position. The holding period
of the securities or currencies comprising the straddle will be deemed not to
begin until the straddle is terminated. For securities offsetting a purchased
put, this adjustment of the holding period may increase the gain from sales of
securities held less than three months. The holding period of the security
offsetting an "in-the-money qualified covered call" option on an equity
security will not include the period of time the option is outstanding.
Losses on written covered calls and purchased puts on securities,
excluding certain "qualified covered call" options on equity securities, may
be long-term capital loss, if the security covering the option was held for
more than twelve months prior to the writing of the option.
In order for the Fund to continue to qualify for federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income; i.e., dividends,
interest, income derived from loans of securities, and gains from the sale of
PAGE 21
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 of the Fund may not be changed without the
approval of the lesser of (1) 67% of the Fund's shares present at a meeting of
shareholders if the holders of more than 50% of the outstanding shares are
present in person or by proxy or (2) more than 50% of the Fund's outstanding
shares. Other restrictions in the form of operating policies are subject to
change by the Fund's Board of Directors without shareholder approval. Any
investment restriction set forth herein or in the prospectus which involves a
maximum percentage of securities or assets shall not be considered to be
violated unless an excess over the percentage occurs immediately after, and is
caused by, an acquisition of securities or assets of, or borrowings by, the
Fund.
Fundamental Policies
As a matter of fundamental policy, the Fund may not:
(1) Borrowing. Borrow money except that the Fund may (i) borrow for
non-leveraging, temporary or emergency purposes and (ii) engage in
reverse repurchase agreements and make other investments or engage
in other transactions, which may involve a borrowing, in a manner
consistent with the Fund's investment objective and program,
provided that the combination of (i) and (ii) shall not exceed 33
1/3% of the value of the Fund's total assets (including the amount
borrowed) less liabilities (other than borrowings) or such other
percentage permitted by law. Any borrowings which come to exceed
this amount will be reduced in accordance with applicable law.
The Fund may borrow from banks, other Price Funds or other persons
to the extent permitted by applicable law;
(2) Commodities. Purchase or sell physical commodities; except that
it 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;
PAGE 22
(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 33 1/3% of the
value of the Fund's total assets; (ii) purchase money market
securities and enter into repurchase agreements; and (iii) acquire
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 Price Fund (defined as any other
mutual fund managed or for which T. Rowe Price acts as adviser) unless
each Fund applies for and receives an exemptive order from the SEC or
the SEC issues rules permitting such transactions. The Fund has 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 investments to be commodities.
PAGE 23
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.
Operating Policies
As a matter of operating policy, the Fund may not:
(1) Borrowing. The Fund will not purchase additional securities when
money borrowed exceeds 5% of its total assets;
(2) Control of Portfolio Companies. Invest in companies for the
purpose of exercising management or control;
(3) 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;
(4) Illiquid Securities. 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, 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;
(5) 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
could result from any such purchases;
(6) Margin. Purchase securities on margin, except (i) for use of
short-term credit necessary for clearance of purchases of
portfolio securities and (ii) it may make margin deposits in
connection with futures contracts or other permissible
investments;
(7) Mortgaging. Mortgage, pledge, hypothecate or, in any manner,
transfer any security owned by the Fund as security for
indebtedness except as may be necessary in connection with
permissible borrowings or investments and then such mortgaging,
pledging or hypothecating may not exceed 33 1/3% of the Fund's
total assets at the time of borrowing or investment;
PAGE 24
(8) Oil and Gas Programs. Purchase participations or other direct
interests in or enter into leases with respect to, oil, gas, or
other mineral exploration or development programs;
(9) 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;
(10) Ownership of Portfolio Securities by Officers and Directors.
Purchase or retain the securities of any issuer if, to the
knowledge of the Fund's management, those officers and directors
of the Fund, and of its investment manager, who each owns
beneficially more than .5% of the outstanding securities of such
issuer, together own beneficially more than 5% of such securities;
(11) Short Sales. Effect short sales of securities;
(12) 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 of issuers which at the time of
purchase had been in operation for less than three years (for this
purpose, the period of operation of any issuer shall include the
period of operation of any predecessor or unconditional guarantor
of such issuer). This restriction does not apply to securities of
pooled investment vehicles or mortgage or asset-backed securities;
or
(13) Warrants. Invest in warrants if, as a result thereof, more than
2% of the value of the total assets of the Fund would be invested
in warrants which are not listed on the New York Stock Exchange,
the American Stock Exchange, or a recognized foreign exchange, or
more than 5% of the value of the total assets of the Fund would be
invested in warrants whether or not so listed. For purposes of
these percentage limitations, the warrants will be valued at the
lower of cost or market and warrants acquired by the Funds in
units or attached to securities may be deemed to be without value.
Notwithstanding anything in the above fundamental and operating
restrictions to the contrary, each Fund may invest all of its assets in a
single investment company or a series thereof in connection with a "master-
feeder" arrangement. Such an investment would be made where the Fund (a
"Feeder"), and one or more other Funds with the same investment objective and
program as the Fund, sought to accomplish its investment objective and program
by investing all of its assets in the shares of another investment company
(the "Master"). The Master would, in turn, have the same investment objective
and program as the Fund. The Fund would invest in this manner in an effort to
achieve the economies of scale associated with having a Master fund make
investments in portfolio companies on behalf of a number of Feeder funds.
PAGE 25
INVESTMENT PERFORMANCE
Total Return Performance
The Fund's calculation of total return performance includes the
reinvestment of all capital gain distributions and income dividends for the
period or periods indicated, without regard to tax consequences to a
shareholder in the Fund. Total return is calculated as the percentage change
between the beginning value of a static account in the Fund and the ending
value of that account measured by the then current net asset value, including
all shares acquired through reinvestment of income and capital gains
dividends. The results shown are historical and should not be considered
indicative of the future performance of the Fund. Each average annual
compound rate of return is derived from the cumulative performance of the Fund
over the time period specified. The annual compound rate of return for the
Fund over any other period of time will vary from the average.
From time to time, in reports and 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 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 rates 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)
indices of stocks comparable to those in which the Fund invests; (iv) 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 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
The Fund is a member of the T. Rowe Price Family of Funds and may help
investors achieve various long-term investment goals, such as investing money
for retirement, saving for a down payment on a home, or paying college costs.
To explain how the Fund could be used to assist investors in planning for
PAGE 26
these goals and to illustrate basic principles of investing, various
worksheets and guides prepared by T. Rowe Price and/or T. Rowe Price
Investment Services, Inc. may be made available. These currently include:
the Asset Mix Worksheet which is designed to show shareholders how to reduce
their investment risk by developing a diversified investment plan; 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; and the Retirees Financial Guide which includes
a detailed workbook to determine how much money you can afford to spend and
still preserve your purchasing power and suggests how you might invest to
reach your goal. The Retirement Planning Kit (also available in a PC version)
which includes a detailed workbook to determine how much money you may need
for retirement and suggests how you might invest to reach your goal and the
Retirees Financial Guide which includes a detailed workbook to determine how
much money you can afford to spend and still preserve your purchasing power
and suggests how you might invest to reach your goal. From time to time,
other worksheets and guides may be made available as well. Of course, an
investment in the Fund cannot guarantee that such goals will be met.
From time to time, the example shown on the following page may be used
to assist investors in understanding the different returns and risk
characteristics of various investments, including presentation of historical
returns of these investments. An example of this is shown on the next page.
Historical Returns for Different Investments
Annualized returns for periods ended 12/31/93
50 years 20 years 10 years 5 years
Small-Company Stocks 15.3% 18.8% 10.0% 13.3%
Large-Company Stocks 12.3 12.8 14.9 14.5
Foreign Stocks N/A 14.4 17.9 2.3
Long-Term Corporate Bonds 5.6 10.2 14.0 13.0
Intermediate-Term U.S.
Gov't. Bonds 5.7 9.8 11.4 11.3
Treasury Bills 4.6 7.5 6.4 5.6
U.S. Inflation 4.3 5.9 3.7 3.9
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.
PAGE 27
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*
Asset Mix Average Annualized Value
Returns 20 Years of
Ended 12/31/93 $10,000
Investment
After Period
_____________________ ______________________ ____________
Nominal Real Best Worst
Portfolio Growth Income Safety Return Return** Year Year
I. Low
Risk 40% 40% 20% 11.3% 5.4% 24.9% -9.3%$ 79,775
II. Moderate
Risk 60% 30% 10% 12.1% 6.2% 29.1% -15.6%$ 90,248
III. High
Risk 80% 20% 0% 12.9% 7.0% 33.4% -21.9%$100,031
Source: T. Rowe Price Associates; data supplied by Lehman Brothers, Wilshire
Associates, and Ibbotson Associates.
* Based on actual performance for the 20 years ended 1993 of stocks (85%
Wilshire 5000 and 15% Europe, Australia, Far East [EAFE] Index), bonds
(Lehman Brothers Aggregate Bond Index from 1976-93 and Lehman Brothers
Government/Corporate Bond Index from 1974-75), and 30-day Treasury bills
from January 1974 through December 1993. 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 5.9% for the 20-year period ended 12/31/93.
Redemptions in Kind
In the unlikely event a shareholder were to receive an in kind redemption
of portfolio securities of the Fund, brokerage fees could be incurred by the
shareholder in a subsequent sale of such securities.
Issuance of Fund Shares for Securities
Transactions involving issuance of the Fund's shares for securities or
assets other than cash will be limited to (1) bona fide reorganizations; (2)
statutory mergers; or (3) other acquisitions of portfolio securities that: (a)
meet the investment 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 United States or international exchange or market; and (d) are not
illiquid.
PAGE 28
MANAGEMENT OF FUND
The officers and directors of the Fund are listed below. Unless
otherwise noted, the address of each is 100 East Pratt Street, Baltimore,
Maryland 21202. Except as indicated, each has been an employee of T. Rowe
Price for more than five years. In the list below, the Fund's directors who
are considered "interested persons" of T. Rowe Price or the Fund as defined
under Section 2(a)(19) of the Investment Company Act of 1940 are noted with an
asterisk (*). These directors are referred to as inside directors by virtue
of their officership, directorship and/or employment with T. Rowe Price.
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 Press, Inc., Baltimore, Maryland; Address: 375 Park Avenue,
Suite 2201, New York, New York 10152
DAVID K. FAGIN, Director--Chairman, Chief Executive Officer and Director,
Golden Star Resources, Ltd.; formerly (1986-7/91) President, Chief Operating
Officer and Director, Homestake Mining Company; Address: One Norwest Center,
1700 Lincoln Street, Suite 1950, Denver, Colorado 80203
ADDISON LANIER, Director--Financial management; President and Director, Thomas
Emery's Sons, Inc., and Emery Group, Inc.; Director, Scinet Development and
Holdings, Inc.; Address: 441 Vine Street, #2310, Cincinnati, Ohio 45202-2913
*JOHN H. LAPORTE, JR., Executive Vice President and Director--Managing
Director, T. Rowe Price; Chartered Financial Analyst
JOHN K. MAJOR, Director--Chairman of the Board and President, KCMA
Incorporated, Tulsa, Oklahoma; Address: 126 E. 26 Place, Tulsa, Oklahoma
74114-2422
*JAMES S. RIEPE, Vice President and Director--Managing Director, T. Rowe
Price; Chairman of the Board, T. Rowe Price Services, Inc., T. Rowe Price
Retirement Plan Services, Inc. and T. Rowe Price Trust Company; President and
Director, T. Rowe Price Investment Services, Inc.; Director, Rhone-Poulenc
Rorer, Inc.
*M. DAVID TESTA, President and Director--Chairman of the Board, Price-Fleming;
Managing Director, T. Rowe Price; Vice President and Director, T. Rowe Price
Trust Company; Chartered Financial Analyst
HUBERT D. VOS, Director--President, Stonington Capital Corporation, a private
investment company; Address: 1231 State Street, Suite 210, Santa Barbara, CA
93190-0409
PAUL M. WYTHES, Director--Founding General Partner, Sutter Hill Ventures, a
venture capital limited partnership providing equity capital to young high
technology companies throughout the United States; Director, Teltone
Corporation, Interventional Technologies Inc., and Stuart Medical, Inc.;
Address: 755 Page Mill Road, Suite A200, Palo Alto, California 94304
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 of T. Rowe Price
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.
PAGE 29
RICHARD P. HOWARD, Vice President--Vice President, T. Rowe Price; Chartered
Financial Analyst
DENISE E. JEVNE, Vice President--Vice President of T. Rowe Price
JAMES A. C. KENNEDY, III, Vice President--Managing Director of 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
LENORA V. HORNUNG, Secretary--Vice President, T. Rowe Price
CARMEN F. DEYESU, Treasurer--Vice President, T. Rowe Price, T. Rowe Price
Services, Inc., and T. Rowe Price Trust Company
DAVID S. MIDDLETON, Controller--Vice President, T. Rowe Price, T. Rowe Price
Services, Inc. and T. Rowe Price Trust Company
ROGER L. FIERY, 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
The Fund's Executive Committee, comprised of Messrs. Laporte, Riepe,
and Testa have been authorized by its Board of Directors 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.
PRINCIPAL HOLDERS OF SECURITIES
As of the date of the prospectus, the officers and directors of the
Fund, as a group, owned less than 1% of the outstanding shares of the Fund.
INVESTMENT MANAGEMENT SERVICES
Services Provided by T. Rowe Price
Under the Management Agreement with the Fund, T. Rowe Price provides
the Fund with discretionary investment services. Specifically, T. Rowe Price
is responsible for supervising and directing the investments of the Fund in
accordance with its investment objective, program, and restrictions as
provided in the prospectus and this Statement of Additional Information. T.
Rowe Price is also responsible for effecting all security transactions on
behalf of the Fund, including the allocation of principal business and
portfolio brokerage and the negotiation of commissions. In addition to these
services, T. Rowe Price provides the Fund with certain corporate
administrative services, including: maintaining the Fund's corporate
existence, corporate records, and registering and qualifying the Fund's shares
under federal and state laws; monitoring the financial, accounting, and
administrative functions of the Fund; maintaining liaison with the agents
employed by the Fund such as the Fund's custodian and transfer agent;
assisting the Fund in the coordination of such agents' activities; and
permitting T. Rowe Price's employees to serve as officers, directors, and
committee members of the Fund without cost to the Fund.
PAGE 30
The Fund's Management Agreement also provides that T. Rowe Price, its
directors, officers, employees, and certain other persons performing specific
functions for the Fund will only be liable to the Fund for losses resulting
from willful misfeasance, bad faith, gross negligence, or reckless disregard
of duty.
Management Fee
The Fund pays T. Rowe Price an annual all-inclusive fee (the "Fee") of
0.85%. The Fee is paid monthly to the T. Rowe Price on the first business day
of the next succeeding calendar month and is the sum of the daily Fee accruals
for each month. The daily Fee accrual for any particular day is calculated by
multiplying the fraction of one (1) over the number of calendar days in the
year by the appropriate Fee 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 the Fund and T. Rowe Price provides
that T. Rowe Price will pay all expenses of the 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 the Fund
reserves the right to impose additional fees against shareholder accounts to
defray expenses which would otherwise be paid by T. Rowe Price under the
Management Agreement. The Board does not anticipate levying such charges;
such a fee, if charged, may be retained by the Fund or paid to T. Rowe Price.
DISTRIBUTOR FOR FUND
T. Rowe Price Investment Services, Inc. ("Investment Services"), a
Maryland corporation formed in 1980 as a wholly-owned subsidiary of T. Rowe
Price, serves as the Fund's distributor. Investment Services is registered as
a broker-dealer under the Securities Exchange Act of 1934 and is a member of
the National Association of Securities Dealers, Inc. The offering of the
Fund's shares is continuous.
Investment Services is located at the same address as the Fund and T.
Rowe Price -- 100 East Pratt Street, Baltimore, Maryland 21202.
Investment Services serves as distributor to the Fund pursuant to an
Underwriting Agreement ("Underwriting Agreement"), which provides that the
Fund will pay all fees and expenses in connection with: registering and
qualifying its shares under the various state "blue sky" laws; preparing,
setting in type, printing, and mailing its prospectuses and reports to
shareholders; and issuing its shares, including expenses of confirming
purchase orders.
The Underwriting Agreement provides that Investment Services will pay
all fees and expenses in connection with: printing and distributing
prospectuses and reports for use in offering and selling Fund shares;
PAGE 31
preparing, setting in type, printing, and mailing all sales literature and
advertising; Investment Services' federal and state registrations as a broker-
dealer; and offering and selling Fund shares, except for those fees and
expenses specifically assumed by the Fund. Investment Services' expenses are
paid by T. Rowe Price.
Investment Services acts as the agent of the Fund in connection with
the sale of the Fund shares in all states in which the shares are qualified
and in which Investment Services is qualified as a broker-dealer. Under the
Underwriting Agreement, Investment Services accepts orders for Fund shares at
net asset value. No sales charges are paid by investors or the Fund.
CUSTODIAN
State Street Bank and Trust Company (the "Bank") is the custodian for
the Fund's U.S. securities and cash, but it does not participate in the Fund's
investment decisions. Portfolio securities purchased in the U.S. are
maintained in the custody of the Bank and may be entered into the Federal
Reserve Book Entry System, or the security depository system of the Depository
Trust Corporation. The Fund has entered into a Custodian Agreement with The
Chase Manhattan Bank, N.A., London, pursuant to which portfolio securities
which are purchased outside the United States are maintained in the custody of
various foreign branches of The Chase Manhattan Bank and such other
custodians, including foreign banks and foreign securities depositories, in
accordance with regulations under the Investment Company Act of 1940. The
Bank's main office is at 225 Franklin Street, Boston, Massachusetts 02110.
The address for The Chase Manhattan Bank, N.A., London is Woolgate House,
Coleman Street, London, EC2P 2HD, England.
PORTFOLIO TRANSACTIONS
Investment or Brokerage Discretion
Decisions with respect to the purchase and sale of portfolio securities
on behalf of the Fund are made by T. Rowe Price. T. Rowe Price is also
responsible for implementing these decisions, including the negotiation of
commissions and the allocation of portfolio brokerage and principal business.
How Brokers and Dealers are Selected
Equity Securities
In purchasing and selling the Fund's portfolio securities, it is T.
Rowe Price's policy to obtain quality execution at the most favorable prices
through responsible brokers and dealers and, in the case of agency
transactions, at competitive commission rates. However, under certain
conditions, the Fund may pay higher brokerage commissions in return for
brokerage and research services. As a general practice, over-the-counter
orders are executed with market-makers. In selecting among market-makers, T.
Rowe Price generally seeks to select those it believes to be actively and
effectively trading the security being purchased or sold. In selecting
broker-dealers to execute the Fund's portfolio transactions, consideration is
given to such factors as the price of the security, the rate of the
commission, the size and difficulty of the order, the reliability, integrity,
PAGE 32
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
PAGE 33
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 offering 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
PAGE 34
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 Fund. T. Rowe Price may occasionally make
recommendations to other clients which result in their purchasing or selling
securities simultaneously with the Fund. As a result, the demand for
securities being purchased or the supply of securities being sold may
increase, and this could have an adverse effect on the price of those
securities. It is T. Rowe Price's policy not to favor one client over another
in making recommendations or in placing orders. T. Rowe Price frequently
follows the practice of grouping orders of various clients for execution which
generally results in lower commission rates being attained. In certain cases,
where the aggregate order is executed in a series of transactions at various
prices on a given day, each participating client's proportionate share of such
order reflects the average price paid or received with respect to the total
order. T. Rowe Price has established a general investment policy that it will
ordinarily not make additional purchases of a common stock of a company for
its clients (including the T. Rowe Price Funds) if, as a result of such
PAGE 35
purchases, 10% or more of the outstanding common stock of such company would
be held by its clients in the aggregate.
To the extent possible, T. Rowe Price intends to recapture solicitation
fees paid in connection with tender offers through T. Rowe Price Investment
Services, Inc., the Fund's distributor. At the present time, T. Rowe Price
does not recapture commissions or underwriting discounts or selling group
concessions in connection with taxable securities acquired in underwritten
offerings. T. Rowe Price does, however, attempt to negotiate elimination of
all or a portion of the selling-group concession or underwriting discount when
purchasing tax-exempt municipal securities on behalf of its clients in
underwritten offerings.
Transactions with Related Brokers and Dealers
As provided in the Investment Management Agreement between the Fund and
T. Rowe Price, T. Rowe Price is responsible not only for making decisions with
respect to the purchase and sale of the Fund's portfolio securities, but also
for implementing these decisions, including the negotiation of commissions and
the allocation of portfolio brokerage and principal business. It is expected
that T. Rowe Price may place orders for the Fund's portfolio transactions with
broker-dealers through the same trading desk T. Rowe Price uses for portfolio
transactions in domestic securities. The trading desk accesses brokers and
dealers in various markets in which the Fund's foreign securities are located.
These brokers and dealers may include certain affiliates of Robert Fleming
Holdings Limited ("Robert Fleming Holdings") and Jardine Fleming Group Limited
("JFG"), persons indirectly related to T. Rowe Price. Robert Fleming
Holdings, through Copthall Overseas Limited, a wholly-owned subsidiary, owns
25% of the common stock of Rowe Price-Fleming International, Inc. ("RPFI"), an
investment adviser registered under the Investment Advisers Act of 1940.
Fifty percent of the common stock of RPFI is owned by TRP Finance, Inc., a
wholly-owned subsidiary of T. Rowe Price, and the remaining 25% is owned by
Jardine Fleming Holdings Limited, a subsidiary of JFG. JFG is 50% owned by
Robert Fleming Holdings and 50% owned by Jardine Matheson Holdings Limited.
Orders for the Fund's portfolio transactions placed with affiliates of Robert
Fleming Holdings and JFG will result in commissions being received by such
affiliates.
The Board of Directors/Trustees of the Fund has authorized T. Rowe
Price to utilize certain affiliates of Robert Fleming and JFG in the capacity
of broker in connection with the execution of the Fund's portfolio
transactions. These affiliates include, but are not limited to, Jardine
Fleming Securities Limited ("JFS"), a wholly-owned subsidiary of JFG, Robert
Fleming & Co. Limited ("RF&Co."), Jardine Fleming Australia Securities
Limited, and Robert Fleming, Inc. (a New York brokerage firm). Other
affiliates of Robert Fleming 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.
PRICING OF SECURITIES
Equity securities listed or regularly traded on a securities exchange
(including NASDAQ) are valued at the last quoted sales price on the day the
PAGE 36
valuations are made. A security which is listed or traded on more than one
exchange is valued at the quotation on the exchange determined to be the
primary market for such security. Other equity securities and those listed
securities that are not traded on a particular day are valued at a price
within the limits of the latest bid and asked prices deemed by the Board of
Directors, or by persons delegated by the Board, best to reflect a 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 which, when combined with
accrued interest, approximates fair value.
Assets and liabilities for which the above valuation procedures are
inappropriate or are deemed not to reflect fair value are stated at fair value
as determined in good faith by or under the supervision of the officers of the
Fund, as authorized by the Board of Directors.
NET ASSET VALUE PER SHARE
The purchase and redemption price of the Fund's shares is equal to the
Fund's net asset value per share or share price. The Fund determines its net
asset value per share by subtracting 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 calculated as of
the close of trading on the New York Stock Exchange ("NYSE") every day the
NYSE is open for trading. The NYSE is closed on the following days: New
Year's Day, Washington's Birthday, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day, and Christmas Day.
Determination of net asset value (and the offering, sale, redemption
and repurchase of shares) for the Fund may be suspended at times (a) during
which the NYSE is closed, other than customary weekend and holiday closings,
(b) during which trading on the NYSE is restricted (c) during which an
emergency exists as a result of which disposal by the Fund of securities owned
by it is not reasonably practicable or it is not reasonably practicable for
the Fund fairly to determine the value of its net assets, or (d) during which
a governmental body having jurisdiction over the Fund may by order permit such
a suspension for the protection of the Fund's shareholders; provided that
applicable rules and regulations of the Securities and Exchange Commission (or
any succeeding governmental authority) shall govern as to whether the
conditions prescribed in (b), (c) or (d) exist.
DIVIDENDS
Unless the separate account elects otherwise, dividends and capital
gain distributions will be reinvested on the reinvestment date using the NAV
per share of that date. The reinvestment date normally precedes the payment
date by about 10 days although the exact timing is subject to change.
PAGE 37
TAX STATUS
The Fund intends to qualify as a "regulated investment company" under
Subchapter M of the Internal Revenue Code of 1986, as amended ("Code") 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 the 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 the funds 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 were distributed to shareholders.
PAGE 38
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 ordinary income for tax purposes. 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
The Charter of the T. Rowe Price Equity Series, Inc. (the "Corporation")
authorizes its Board of Directors to classify and reclassify any and all
shares which are then unissued, including unissued shares of capital stock
into any number of classes or series, each class or series consisting of such
number of shares and having such designations, such powers, preferences,
rights, qualifications, limitations, and restrictions, as shall be determined
by the Board subject to the Investment Company Act and other applicable law.
Currently, the Corporation consists of two series, T. Rowe Price Equity Income
Portfolio and T. Rowe Price New America Growth Portfolio. Each series
represents a separate class of the Corporation's shares and has different
objectives and investment policies. The T. Rowe Price New America Growth
Portfolio is described in a separate Statement of Additional Information. The
shares of any such additional classes or series might therefore differ from
the shares of the present class and series of capital stock and from each
other as to preferences, conversions or other rights, voting powers,
restrictions, limitations as to dividends, qualifications or terms or
conditions of redemption, subject to applicable law, and might thus be
superior or inferior to the capital stock or to other classes or series in
various characteristics. The Corporation's Board of Directors may increase or
decrease the aggregate number of shares of stock or the number of shares of
stock of any class or series that the Funds have authorized to issue without
shareholder approval.
Except to the extent that the Corporation's Board of Directors might
provide by resolution that holders of shares of a particular class are
entitled to vote as a class on specified matters presented for a vote of the
holders of all shares entitled to vote on such matters, there would be no
right of class vote unless and to the extent that such a right might be
construed to exist under Maryland law. The Charter contains no provision
entitling the holders of the present class of capital stock to a vote as a
class on any matter. Accordingly, the preferences, rights, and other
characteristics attaching to any class of shares, including the present class
of capital stock, might be altered or eliminated, or the class might be
combined with another class or classes, by action approved by the vote of the
PAGE 39
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 the 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 Corporation, a
special meeting of shareholders of the Corporation shall be called by the
Secretary of the Corporation on the written request of shareholders entitled
to cast at least 10% of all the votes of the Corporation entitled to be cast
at such meeting. Shareholders requesting such a meeting must pay to the
Corporation the reasonably estimated costs of preparing and mailing the notice
of the meeting. The Corporation, however, will otherwise assist the
shareholders seeking to hold the special meeting in communicating to the other
shareholders of the Corporation to the extent required by Section 16(c) of the
Investment Company Act of 1940.
FEDERAL AND STATE REGISTRATION OF SHARES
The Fund's shares are registered for sale under the Securities Act of
1933, and the Fund or its shares are registered under the laws of all states
which require registration, as well as the District of Columbia and Puerto
Rico.
LEGAL COUNSEL
Shereff, Friedman, Hoffman & Goodman, whose address is 919 Third Avenue,
New York, New York 10022, is legal counsel to the Fund.
INDEPENDENT ACCOUNTANTS
Price Waterhouse, 7 St. Paul Street, Suite 1700, Baltimore, Maryland
21202, are independent accountants to the Fund. The Statement of Assets and
Liabilities of the Fund as of March 28, 1994, included in the Statement of
PAGE 40
Additional Information, has been included in reliance on the report of Price
Waterhouse, given on the authority of said firm as experts in auditing and
accounting.
PAGE 41
T. ROWE PRICE EQUITY SERIES, INC.
STATEMENT OF ASSETS AND LIABILITIES
MARCH 28, 1994
New
Equity America
Income Growth
Portfolio Portfolio
_________ _________
Assets
Receivable for Fund shares sold $50,000 $50,000
Deferred organizational expenses 3,050 3,050
_______ _______
Total assets $53,050 $53,050
Liabilities
Amount due Manager 1,050 1,050
Accrued expenses 2,000 2,000
_______ _______
Total liabilities 3,050 3,050
_______ _______
Net Assets - offering and redemption
price of $10.00 per share; 1,000,000,000
shares of $.0001 par value capital
stock authorized; 5,000 shares
outstanding $50,000 $50,000
_______ _______
_______ _______
NOTE TO STATEMENT OF ASSETS AND LIABILITIES
T. Rowe Price Equity Series, Inc. (the "Corporation") was organized on
January 31, 1994, as a Maryland corporation and is registered under the
Investment Company Act of 1940. The Corporation is a series fund, of which
the T. Rowe Price Equity Income Portfolio and T. Rowe Price New America Growth
Portfolio (the "Funds"), diversified, open-end management investment companies
are the only portfolios currently established. The Corporation has had no
operations other than those matters related to organization and registration
as an investment company, the registration of shares for sale under the
Securities Act of 1933, and the sale of 5,000 shares of the T. Rowe Price
Equity Income Portfolio at $10.00 per share and the sale of 5,000 shares of
the T. Rowe Price New America Growth Portfolio at $10.00 per share on March
28, 1994 to T. Rowe Price Associates, Inc. Each Fund's receivable for fund
shares sold was funded by T. Rowe Price Associates, Inc. on March 29, 1994.
The Funds have entered into an investment management agreement with T. Rowe
Price Associates, Inc. (the Manager) which is described in the Statement of
Additional Information under the heading "Investment Management Services."
Organizational expenses of $3,050 for each fund have been accrued at March
28, 1994, and will be amortized on a straight-line basis over a period not to
exceed sixty months. The Manager has agreed to advance certain organizational
expenses incurred by the Funds and will be reimbursed for such expenses
approximately six months after the commencement of the Funds' operations.
PAGE 42
The Manager has agreed that in the event any of its initial shares are
redeemed during the 60-month amortization period of the deferred
organizational expenses, proceeds from a redemption of the shares representing
the initial capital will be reduced by a pro rata portion of any unamortized
organizational expenses.
PAGE 43
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
T. Rowe Price Equity Series, Inc.
In our opinion, the accompanying statement of assets and liabilities
presents fairly, in all material respects, the financial position of the T.
Rowe Price Equity Income Portfolio and T. Rowe Price New America Growth
Portfolio (the two funds constituting T. Rowe Price Equity Series, Inc.) at
March 28, 1994, in conformity with generally accepted accounting principles.
This financial statement is the responsibility of the Funds' management; our
responsibility is to express an opinion on this financial statement based on
our audit. We conducted our audit of this financial statement in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statement is free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statement, assessing the accounting principles used and significant estimates
made by management and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for the
opinion expressed above.
/s/Price Waterhouse
PRICE WATERHOUSE
Baltimore, Maryland
March 29, 1994
