PAGE 1 Registration Nos. 811-07143
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 / X /
Pre-Effective Amendment No. ___ / /
Post-Effective Amendment No. ___ / /
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 / X /
Amendment No. ___ / /
T. ROWE PRICE EQUITY SERIES, INC.
__________________________________
(Exact Name of Registrant as Specified in Charter)
100 East Pratt Street, Baltimore, Maryland 21202
__________________________________________ _________
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code 410-547-2000
____________
Henry H. Hopkins
100 East Pratt Street
Baltimore, Maryland 21202
__________________________________________
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering March 31, 1994
___________
It is proposed that this filing will become effective (check appropriate box):
/ / immediately upon filing pursuant to paragraph (b)
/ / on (date) pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)
/ / on (date) pursuant to paragraph (a) of Rule 485
PAGE 2
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933+
______________________________________________________________________________
Proposed Proposed
Maximum Maximum
Amount Offering Aggregate
Title of Securities Being Price Offering Amount of
Being Registered Registered Per Unit Price Registration Fee
______________________________________________________________________________
Capital Stock - $.0001 Indefinite Varying prices calculated $500
par value per share Number as set forth in prospectus
______________________________________________________________________________
The purpose of this Registration Statement is to register the Registrant under
the Investment Company Act of 1940, to register the shares of the Registrant
under the Securities Act of 1933 and to declare pursuant to Section 24(f) of
the Investment Company Act of 1940 and Rule 24f-2 thereunder that an
indefinite number of its securities is being registered by this Registration
Statement.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states the Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a) may
determine.
SUBJECT TO COMPLETION
Information contained herein is subject to completion or amendment. A
Registration Statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the Registration Statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
any such state.
PAGE 3
T. ROWE PRICE EQUITY INCOME PORTFOLIO
T. ROWE PRICE NEW AMERICA GROWTH PORTFOLIO
CROSS REFERENCE SHEET
N-1A Item No. Location
_____________ ________
PART A
Item 1. Cover Page Cover Page
Item 2. Synopsis Summary of Fund Fees and
Expenses
Item 3. Condensed Financial Information +
Item 4. General Description of Registrant Investment Summary; Investment
Objective; Fund
Characteristics; Investment
Program; Summary of Fund Fees
and Expenses; Investing in the
Stock Market; Investment
Practices; Performance
Information; Capital Stock;
Item 5. Management of the Fund Summary of Fund Fees and
Expenses; Management of the
Fund; Expenses and Management
Fee
Item 6. Capital Stock and Other Securities Voting Rights; Capital Stock;
Dividends and Taxation
Item 7. Purchase of Securities Being Offered Purchase and Redemption of
Shares; NAV, Pricing, and
Effective Date
Item 8. Redemption or Repurchase Purchase and Redemption of
Shares; NAV, Pricing, and
Effective Date
Item 9. Pending Legal Proceedings +
PART B
Item 10. Cover Page Cover Page
Item 11. Table of Contents Table of Contents
Item 12. General Information and History +
Item 13. Investment Objectives and Policies Investment Objective and
Policies; Investment Objective;
Investment Program; Investment
Restrictions; Investment
Performance
Item 14. Management of the Registrant Management of Fund
Item 15. Control Persons and Principal Principal Holders of
Holders of Securities Securities
Item 16. Investment Advisory and Other Investment Management
Services Services; Custodian;
Independent Accountants;
Legal Counsel
Item 17. Brokerage Allocation Portfolio Transactions
Item 18. Capital Stock and Other Securities Dividends; Capital Stock
PAGE 4
Item 19. Purchase, Redemption and Pricing Redemptions in Kind;
of Securities Being Offered Pricing of Securities; Net
Asset Value Per Share; Federal
and State Registration of
Shares; Ratings of Corporate
Debt Securities
Item 20. Tax Status Tax Status
Item 21. Underwriters Distributor for Fund
Item 22. Calculation of Yield Quotations of
Money Market Funds +
Item 23. Financial Statements +
PART C
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C to this Registration Statement
___________________________________
+ Not applicable or negative answer
PAGE 5
Prospectus for the T. Rowe Price Equity Series, Inc. dated March 31, 1994,
should be inserted here.
PAGE 1
EQUITY INCOME PORTFOLIO 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. Shares of the
Fund are currently being offered to
insurance companies for the purpose of
funding variable annuity contracts.
Prospectus ___________________________________________
March 31, 1994 T. Rowe Price Associates, Inc. (T. Rowe
T. Rowe Price Equity Price) was founded in 1937 by the late
Series, Inc. Thomas Rowe Price, Jr. As of December 31,
1993, the firm and its affiliates managed
over $____ billion including more than $___
billion in conservative, dividend focused
Table of Contents equity investments, for approximately two
and a half million individual and
Fund Information institutional investors.
Investment Objective __________________________________________
Fund Characteristics This prospectus contains information that a
Investment Program prospective Contract Holder or Participant
Summary of Fund Fees should know about the Fund before
and Expenses investing. Please keep it for future
Voting Rights reference. A Statement of Additional
Investing in the Stock Information for the Fund (dated March 31,
Market 1994) has been filed with the Securities
Investment Practices and Exchange Commission and is incorporated
Performance Information by reference in this prospectus. It is
Capital Stock available at no charge by calling: 1-800-
Purchase and Redemption 638-5660.
of Shares
NAV, Pricing, and THESE SECURITIES HAVE NOT BEEN APPROVED OR
Effective Date DISAPPROVED BY THE SECURITIES AND EXCHANGE
Dividends and Taxation COMMISSION, OR ANY STATE SECURITIES
Management of the Fund COMMISSION, NOR HAS THE SECURITIES AND
Expenses and Management EXCHANGE COMMISSION, OR ANY STATE
Fee SECURITIES COMMISSION, PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
________________________ ___________________________________________
INVESTMENT OBJECTIVE The Fund's investment objective is to
provide substantial dividend income and
also capital appreciation by investing
PAGE 2
primarily in dividend-paying common stocks
of established companies.
________________________ ___________________________________________
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 total
return 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.
Variable annuity Contract Holders or
Participants are not the shareholders of
the Fund. Rather, the separate account is
the shareholder, although voting rights may
be passed through to Contract Holders or
Participants. The variable annuity
contracts are described in separate
prospectuses issued by the insurance
companies. The Fund assumes no
responsibility for such prospectuses.
________________________ ___________________________________________
INVESTMENT PROGRAM 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
PAGE 3
Investing in high the total return from equity investments.
dividend-paying Over time, reinvested dividend income has
companies. accounted for over 40% of the total return
of the Standard & Poor's 500 Stock Index
(S&P 500), a broad-based and widely used
index of common stock prices. 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.
The Fund's investments will generally be
made in companies which share some of the
following characteristics:
o established operating histories;
o above-average current dividend
yields relative to the S&P 500;
o low price/earnings ratios relative
to the S&P 500;
o strong balance sheets and other
financial characteristics; and
o low stock price relative to
company's underlying value as
measured by assets, earnings, cash
flow or business franchises.
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. The
Fund may also invest in securities
convertible into or ultimately exchangeable
for common stock (i.e., convertible bonds
or convertible preferred stock).
PAGE 4
In order to further enhance its income,
the Fund may also invest its assets in
fixed income securities (corporate,
government, and municipal bonds of various
maturities), preferred stocks, and
warrants. The Fund will generally purchase
debt securities that are considered
investment grade but may invest up to 10%
of its assets in noninvestment-grade debt
securities. The Fund may, from time to
time, 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. The Fund may invest in U.S.-
traded, dollar-denominated securities of
foreign issuers--limited to 20% of its
assets. Non-dollar denominated equity
securities of foreign issuers will be
limited to 10% of the Fund's assets and
non-dollar denominated fixed income
securities to 10% of the Fund's assets.
Securities of the Fund generally will be
listed on a national securities exchange
or, if not so listed, will usually have an
established over-the-counter market.
Please see Investment Policies for a more
complete description of the Fund's
investments.
________________________ ___________________________________________
SUMMARY OF FUND FEES AND Management Fee. The Fund pays T. Rowe
EXPENSES Price an annual investment management fee
of _____% of the Fund's average daily net
assets.
Transfer Agent, Shareholder Servicing, and
Administrative Costs. The Fund is expected
to pay fees to: (i) T. Rowe Price Services,
Inc. (TRP Services) for transfer and
dividend disbursing agent functions and
shareholder services for all accounts and
(ii) T. Rowe Price for calculating the
daily share price and maintaining the
PAGE 5
portfolio and general accounting records of
the Fund. These fees are expected to total
approximately $_________ and $_________,
respectively, for the period ending
December 31, 1994.
Variable Annuity Charges. Variable annuity
fees and charges are in addition to those
described above and are described in the
variable annuity prospectuses.
________________________ ___________________________________________
VOTING RIGHTS The shares of the Fund have equal voting
rights. The various insurance companies
own all the outstanding shares of the Fund
in their separate accounts that are
registered under the 1940 Act. 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.
________________________ ___________________________________________
INVESTING IN THE STOCK Common stocks offer a way to invest for
MARKET 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. For this
reason, equity investors should have a
long-term investment horizon and be willing
to wait out bear markets.
The accompanying charts show year-by-year
stock market returns as well as longer-term
performance. (The market is represented by
Standard & Poor's 500 Stock Index of large-
company stocks.) In 10 of the years from
1950 through 1993, stocks posted negative
returns, as shown, which means they rose
77% of the time. For this same time span,
however, all cumulative returns for 10-year
rolling periods were positive. Thus, the
PAGE 6
risk of incurring a loss was reduced
considerably for longer holding periods.
Not all areas of the stock market behave
like the large companies reflected in the
S&P 500. For example, small-company stocks,
especially those of fast-growing, emerging
companies, are typically more volatile than
large-company issues, and indices tracking
them, such as the Nasdaq Composite or
Russell 2000, would show this volatility.
Your investment in the Fund will be
subject to the fluctuations -- up or down
-- described above. You should weigh this
factor carefully before investing.
Volatility of Stock Returns
(S&P 500 Stock Index)*
1 Year Annual Total Returns
11.95 -7.15
1960 0.49 6.62
26.91 18.63
-8.7 1980 32.45
22.8 -4.97
16.48 21.56
12.46 22.56
-10.07 6.22
23.95 31.72
11.07 18.7
8.44 5.16
1970 3.95 16.59
14.3 31.41
19 1990 -2.79
-14.69 30.41
-26.47 7.61
37.23 1993 10.07
23.93
10-Year Cumulative Total Return
485.72 42.42
1960346.93 36.72
357.4 77.14
252.86 1980 125.71
PAGE 7
337.56 87.67
234.06 91.7
185.6 175.41
141.09 297.82
234.93 281.84
159.57 265.73
112.28 314.19
1970119.59 352.92
97.77 401.7
157.78 1990 268.24
79.08 405.31
13.06 347.46
37.96 1993 301.77
90.12
*The S&P 500, a registered trademark of
Standard & Poor's Corporation, is an
unmanaged index of common stocks and
includes investment of dividends. This
chart is intended as an illustration of
historical common stock behavior and does
not represent the performance of any T.
Rowe Price mutual fund. Past results do not
indicate future returns.
________________________ ___________________________________________
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
(stated on page __) and to change 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 8 Types of Portfolio Securities
Fund managers have In seeking to meet its investment
considerable leeway in objective, the Fund may invest in any type
choosing investment of security whose investment
strategies and selecting characteristics are consistent with the
securities they believe Fund's investment program. These and some
will help the Fund of the other investment techniques the Fund
achieve its objective. 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.
Preferred stock, which has a specified
dividend, 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
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. The Fund will
generally purchase convertible securities
in companies which meet the investment
PAGE 9
criteria for the Fund. 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 for
non-dollar denominated securities, 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 non-dollar
denominated equity securities, 10% of its
total assets in non-dollar denominated
fixed income securities and 20% of its
total assets in dollar-denominated foreign
securities traded in the U.S.
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 fall and falling when interest
rise.
PAGE 10
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.
Operating Policy. The Fund may invest up
to 10% of its total assets in securities
rated below-investment grade.
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.
PAGE 11
Operating Policy. The Fund will not invest
more than 15% of its net assets in illiquid
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
PAGE 12
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 to adjust 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 non-U.S. dollar 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 non-dollar securities
from adverse currency movements, they
involve the risk that anticipated currency
PAGE 13
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 _____%.
________________________ ___________________________________________
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
PAGE 14
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 a
variable annuity, 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.
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
PAGE 15
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 has been managing
investments since joining T. Rowe Price in
______.
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 _________
shareholders in the other ___ T. Rowe Price
Funds.
PAGE 16
________________________ ___________________________________________
PURCHASE AND REDEMPTION For instructions on how to purchase and
OF SHARES 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 Net Asset Value Per Share (NAV). The NAV
EFFECTIVE DATE 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. 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
PAGE 17
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.
________________________ ___________________________________________
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 for its
Contract Holders. All Fund distributions
made to these accounts will be reinvested
automatically in additional Fund shares.
Under current law, dividends and
distributions made by the Fund to separate
accounts are not taxable to the separate
account, the insurance company or the
Contract Holder. This is provided the
separate account meets the diversification
requirements of Section 817 (h) of the
Internal Revenue Code of 1986, as amended.
The Fund intends to diversify its
investments in such a manner as to permit
the separate account to so qualify.
PAGE 18
Foreign Transactions. If the Fund pays
nonrefundable taxes to foreign governments
during the year, the taxes will reduce the
Fund's dividends.
________________________ ___________________________________________
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.
________________________ ___________________________________________
EXPENSES AND MANAGEMENT Under the management agreement, all
FEE expenses of the Fund will be paid by T.
PAGE 19
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.
(See "Transaction Costs and Fund
Expenses.")
PAGE 20
For Information Call: Prospectus
T. Rowe Price Equity Income
Portfolio
March 31, 1994
T. ROWE PRICE
Invest With ConfidenceR
PAGE 6
Prospectus for the T. Rowe Price Equity Series, Inc. dated March 31, 1994,
should be inserted here.
PAGE 1
NEW AMERICA GROWTH INVESTMENT SUMMARY
PORTFOLIO 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
Prospectus industries.
March 31, 1994 ___________________________________________
T. Rowe Price Equity T. Rowe Price Associates, Inc. (T. Rowe
Series, Inc. Price) was founded in 1937 by the late
Thomas Rowe Price, Jr. As of December 31,
1993, the firm and its affiliates managed
over $____ billion including more than $___
billion in conservative, dividend focused
equity investments, for approximately two
and a half million individual and
institutional investors.
__________________________________________
Table of Contents This prospectus contains information that a
prospective Contract Holder or Participant
Fund Information should know about the Fund before
Investment Objective investing. Please keep it for future
Fund Characteristics reference. A Statement of Additional
Investment Program Information for the Fund (dated March 31,
Summary of Fund Fees 1994) has been filed with the Securities
and Expenses and Exchange Commission and is incorporated
Voting Rights by reference in this prospectus. It is
Investing in the Stock available at no charge by calling: 1-800-
Market 638-5660.
Investment Practices
Performance Information THESE SECURITIES HAVE NOT BEEN APPROVED OR
Capital Stock DISAPPROVED BY THE SECURITIES AND EXCHANGE
Purchase and Redemption COMMISSION, OR ANY STATE SECURITIES
of Shares COMMISSION, NOR HAS THE SECURITIES AND
NAV, Pricing, and EXCHANGE COMMISSION, OR ANY STATE
Effective Date SECURITIES COMMISSION, PASSED UPON THE
Dividends and Taxation ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
Management of the Fund ANY REPRESENTATION TO THE CONTRARY IS A
Expenses and Management CRIMINAL OFFENSE.
Fee
________________________ ___________________________________________
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.
PAGE 2
_________________________ ___________________________________________
FUND CHARACTERISTICS In pursuing its objective, the Fund may
also invest in 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.
Variable annuity Contract Holders or
Participants are not the shareholders of
the Fund. Rather, the separate account is
the shareholder, although voting rights may
be passed through to Contract Holders or
Participants. The variable annuity
contracts are described in separate
prospectuses issued by the insurance
companies. The Fund assumes no
responsibility for such prospectuses.
________________________ ___________________________________________
INVESTMENT PROGRAM 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
Investing in growth to grow faster than both inflation and the
companies operating in economy will be rewarded with higher stock
service industries. 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
PAGE 3
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
PAGE 4
marketplace. Securities of the Fund
generally will be listed on a national
securities exchange or, if not listed, will
usually have an established over-the-
counter market. The Fund may also acquire
restricted securities.
Please see Investment Policies for a more
complete description of the Fund's
investments.
________________________ ___________________________________________
SUMMARY OF FUND FEES AND Management Fee. The Fund pays T. Rowe
EXPENSES Price an annual investment management fee
of ______% of the Fund's average daily net
assets.
Transfer Agent, Shareholder Servicing, and
Administrative Costs. The Fund is expected
to pay fees to: (i) T. Rowe Price Services,
Inc. (TRP Services) for transfer and
dividend disbursing agent functions and
shareholder services for all accounts and
(ii) T. Rowe Price for calculating the
daily share price and maintaining the
portfolio and general accounting records of
the Fund. These fees are expected to total
approximately $__________ and $____________
respectively, for the period ending
December 31, 1994.
Variable Annuity Charges. Variable annuity
fees and charges are in addition to those
described above and are described in the
variable annuity prospectuses.
________________________ ___________________________________________
VOTING RIGHTS The shares of the Fund have equal voting
rights. The various insurance companies
own all the outstanding shares of the Fund
in their separate accounts that are
registered under the 1940 Act. 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.
PAGE 5
________________________ ___________________________________________
INVESTING IN THE STOCK Common stocks offer a way to invest for
MARKET 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. For this
reason, equity investors should have a
long-term investment horizon and be willing
to wait out bear markets.
The accompanying charts show year-by-year
stock market returns as well as longer-term
performance. (The market is represented by
Standard & Poor's 500 Stock Index of large-
company stocks.) In 10 of the years from
1950 through 1993, stocks posted negative
returns, as shown, which means they rose
77% of the time. For this same time span,
however, all cumulative returns for 10-year
rolling periods were positive. Thus, the
risk of incurring a loss was reduced
considerably for longer holding periods.
Not all areas of the stock market behave
like the large companies reflected in the
S&P 500. For example, small-company stocks,
especially those of fast-growing, emerging
companies, are typically more volatile than
large-company issues, and indices tracking
them, such as the Nasdaq Composite or
Russell 2000, would show this volatility.
Your investment in the Fund will be
subject to the fluctuations -- up or down
-- described above. You should weigh this
factor carefully before investing.
Volatility of Stock Returns
(S&P 500 Stock Index)*
1 Year Annual Total Returns
PAGE 6
11.95 -7.15
1960 0.49 6.62
26.91 18.63
-8.7 1980 32.45
22.8 -4.97
16.48 21.56
12.46 22.56
-10.07 6.22
23.95 31.72
11.07 18.7
8.44 5.16
1970 3.95 16.59
14.3 31.41
19 1990 -2.79
-14.69 30.41
-26.47 7.61
37.23 1993 10.07
23.93
10-Year Cumulative Total Return
485.72 42.42
1960346.93 36.72
357.4 77.14
252.86 1980 125.71
337.56 87.67
234.06 91.7
185.6 175.41
141.09 297.82
234.93 281.84
159.57 265.73
112.28 314.19
1970119.59 352.92
97.77 401.7
157.78 1990 268.24
79.08 405.31
13.06 347.46
37.96 1993 301.77
90.12
*The S&P 500, a registered trademark of
Standard & Poor's Corporation, is an
unmanaged index of common stocks and
includes investment of dividends. This
chart is intended as an illustration of
historical common stock behavior and does
not represent the performance of any T.
PAGE 7
Rowe Price mutual fund. Past results do not
indicate future returns.
________________________ ___________________________________________
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
(stated on page __) and to change 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.
Fund managers have Types of Portfolio Securities
considerable leeway in In seeking to meet its investment
choosing investment objective, the Fund may invest in any type
strategies and selecting of security whose investment
securities they believe characteristics are consistent with the
will help the Fund Fund's investment program. These and some
achieve its objective. 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.
Preferred stock, which has a specified
dividend, ranks after bonds and before
common stocks in its claim on income for
dividend payments and on assets should the
PAGE 8
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
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. The Fund will
generally purchase convertible securities
in companies which meet the investment
criteria for the Fund. 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 for
non-dollar denominated securities, the
PAGE 9
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 non-dollar
denominated securities and ____% of its
total assets in dollar-denominated foreign
securities traded in the U.S.
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.
Types of Management Practices
Cash Position. The Fund will hold a certain
PAGE 10
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 to adjust its
overall exposure to certain markets. The
PAGE 11
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 non-U.S. dollar 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 non-dollar securities
from adverse currency movements, 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
PAGE 12
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 ____%.
________________________ ___________________________________________
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 a
variable annuity, you should carefully
PAGE 13
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.
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
PAGE 14
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
has been managing investments since joining
T. Rowe Price in ______.
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 _________
shareholders in the other ___ T. Rowe Price
Funds.
________________________ ___________________________________________
PURCHASE AND REDEMPTION For instructions on how to purchase and
OF SHARES 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,
PAGE 15
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 Net Asset Value Per Share (NAV). The NAV
EFFECTIVE DATE 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. 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
PAGE 16
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.
________________________ ___________________________________________
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 for its
Contract Holders. All Fund distributions
made to these accounts will be reinvested
automatically in additional Fund shares.
Under current law, dividends and
distributions made by the Fund to separate
accounts are not taxable to the separate
account, the insurance company or the
Contract Holder. This is provided the
separate account meets the diversification
requirements of Section 817 (h) of the
Internal Revenue Code of 1986, as amended.
The Fund intends to diversify its
investments in such a manner as to permit
the separate account to so qualify.
Foreign Transactions. If the Fund pays
nonrefundable taxes to foreign governments
during the year, the taxes will reduce the
Fund's dividends.
________________________ ___________________________________________
MANAGEMENT OF THE FUND Investment Manager. T. Rowe Price is
responsible for selection and management of
the Fund's portfolio investments. T. Rowe
PAGE 17
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.
________________________ ___________________________________________
EXPENSES AND MANAGEMENT Under the management agreement, all
FEE 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
PAGE 18
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.
(See "Transaction Costs and Fund
Expenses.")
PAGE 19
Prospectus
For Information Call:
T. Rowe Price New America
Growth Portfolio
March 31, 1994
T. ROWE PRICE
Invest With ConfidenceR
PAGE 7
STATEMENT OF ADDITIONAL INFORMATION
T. Rowe Price Equity Series, Inc. (the "Corporation")
T. Rowe Price Equity Income Portfolio
(the "Fund")
Shares of the Fund are currently being offered to insurance company
separate accounts established for the purpose of funding variable annuity
contracts. Variable annuity Contract Holders or Participants are not the
shareholders of the Fund. Rather, the separate account is the shareholder,
although voting rights may be passed through to Contract Holders or
Participants. The variable annuity contracts are described in separate
prospectuses issued by the insurance companies. The Fund assumes no
responsibility for such prospectuses.
In the future, it is possible that the Fund may offer its shares to
separate accounts funding variable annuities 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 April 1, 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 April 1, 1994.
PAGE 8
TABLE OF CONTENTS
Page Page
Capital Stock. . . . . . . . . . Investment Restrictions . . . . . .
Custodian. . . . . . . . . . . . Legal Counsel . . . . . . . . . . .
Distributor for Fund . . . . . . Lending of Portfolio Securities . .
Dividends. . . . . . . . . . . . Management of Fund. . . . . . . . .
Federal and State Net Asset Value Per Share . . . . .
Registration of Shares. . . . . Other Investments . . . . . . . . .
Foreign Currency Transactions. . Options . . . . . . . . . . . . . .
Foreign Futures and Options. . . Portfolio Transactions. . . . . . .
Foreign Securities . . . . . . . Pricing of Securities . . . . . . .
Futures Contracts. . . . . . . . Principal Holders of Securities . .
Independent Accountants. . . . . Ratings of Corporate Debt
Investment Management Services . Securities . . . . . . . . . . . .
(pages __ and __ in Prospectus) Repurchase Agreements . . . . . . .
Investment Objective and Program Risk Factors. . . . . . . . . . . .
(page __ in Prospectus) Tax Status. . . . . . . . . . . . .
Investment Objective and Policies . (page __ in Prospectus
Investment Performance . . . . .
Investment Program . . . . . . .
(pages __ and __ in Prospectus)
INVESTMENT OBJECTIVE AND POLICIES
The following information supplements the discussion of the Fund's
investment objective and policies discussed on pages __, __, and __ through __
of the prospectus. Unless otherwise specified, the investment program and
restrictions of the Fund are not fundamental policies. The operating policies
of the Fund are subject to change by its Board of Directors without
shareholder approval. However, shareholders will be notified of a material
change in an operating policy. The fundamental policies of the Fund may not
be changed without the approval of at least a majority of the outstanding
shares of the Fund or, if it is less, 67% of the shares represented at a
meeting of shareholders at which the holders of 50% or more of the shares are
represented.
INVESTMENT OBJECTIVE AND PROGRAM
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. In pursuing its objective, the Fund
emphasizes companies with favorable prospects for increasing dividend income,
and, secondarily, capital appreciation. The Fund's income yield is expected
to be significantly above that of the Standard & Poor's 500 Stock Index. To
enhance capital appreciation potential, the Fund uses a value-oriented
approach, which means it invests in stocks of companies that it believes are
currently undervalued in the marketplace.
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
PAGE 9
program, nor used to play short-term swings in the stock market. The Fund
cannot guarantee it will achieve its investment objective.
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. In addition,
the Fund's investment program permits it to purchase below investment grade
securities. Since investors generally perceive that there are greater risks
associated with investment in lower quality securities, the yields from such
securities normally exceed those obtainable from higher quality securities.
However, the principal value of lower-rated securities generally will
fluctuate more widely than higher quality securities. Lower quality
investments entail a higher risk of default--that is, the nonpayment of
interest and principal by the issuer than higher quality investments. 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.
Debt Obligations
Although the Fund will invest most of its assets in common stocks, it
is permitted to purchase debt securities. Yields on short, intermediate, and
long-term securities are dependent on a variety of factors, including the
general conditions of the money and bond markets, the size of a particular
offering, the maturity of the obligation, and the credit quality and rating of
the issue. Debt securities with longer maturities tend to have higher yields
and are generally subject to potentially greater capital appreciation and
depreciation than obligations with shorter maturities and lower yields. The
market prices of debt securities usually vary, depending upon available
yields. An increase in interest rates will generally reduce the value of
portfolio investments, and a decline in interest rates will generally increase
the value of portfolio investments. The ability of the Fund to achieve its
investment objective is also dependent on the continuing ability of the
issuers of the debt securities in which the Fund invests to meet their
obligations for the payment of interest and principal when due. Although the
Fund seeks to reduce risk by portfolio diversification, credit analysis
(considered by T. Rowe Price to be among the most stringent in the investment
management industry), and attention to trends in the economy, industries and
financial markets, such efforts will not eliminate all risk. There can, of
course, be no assurance that the Fund will achieve its investment objective.
PAGE 10
Special Risks of High Yield Investing
The Fund may invest up to 10% of its total assets in low quality bonds
commonly referred to as "junk bonds." Junk bonds are regarded as
predominantly speculative with respect to the issuer's continuing ability to
meet principal and interest payments. Because investment in low and lower-
medium quality bonds involves greater investment risk, to the extent the Fund
invests in such bonds, achievement of its investment objective will be more
dependent on T. Rowe Price's credit analysis than would be the case if the
Fund was investing in higher quality bonds. High yield bonds may be more
susceptible to real or perceived adverse economic conditions than investment
grade bonds. A projection of an economic downturn, or higher interest rates,
for example, could cause a decline in high yield bond prices because the
advent of such events could lessen the ability of highly leverage issuers to
make principal and interest payments on their debt securities. In addition,
the secondary trading market for high yield bonds may be less liquid than the
market for higher grade bonds, which can adversely affect the ability of a
Fund to dispose of its portfolio securities. Bonds for which there is only a
"thin" market can be more difficult to value inasmuch as objective pricing
data may be less available and judgment may play a greater role in the
valuation process.
Foreign Securities
The Fund may invest in U.S. dollar-denominated and non U.S. dollar-
denominated securities of foreign issuers. The Fund currently intends to
limit its non-dollar denominated equity securities to 10%, its non-dollar
denominated fixed income securities to 10% and its dollar denominated foreign
securities to 20% of total assets.
Because the Fund may invest in foreign securities, investment in the
Fund involves risks that are different in some respects from an investment in
a fund which invests only in securities of U.S. domestic issuers. Foreign
investments may be affected favorably or unfavorably by changes in currency
rates and exchange control regulations. There may be less publicly available
information about a foreign company than about a U.S. company, and foreign
companies may not be subject to accounting, auditing, and financial reporting
standards and requirements comparable to those applicable to U.S. companies.
There may be less governmental supervision of securities markets, brokers and
issuers of securities. Securities of some foreign companies are less liquid
or more volatile than securities of U.S. companies, and foreign brokerage
commissions and custodian fees are generally higher than in the United States.
Settlement practices may include delays and may differ from those customary in
United States markets. Investments in foreign securities may also be subject
to other risks different from those affecting U.S. investments, including
local political or economic developments, expropriation or nationalization of
assets, restrictions on foreign investment and repatriation of capital,
imposition of withholding taxes on dividend or interest payments, currency
blockage (which would prevent cash from being brought back to the United
States), and difficulty in enforcing legal rights outside the U.S.
INVESTMENT PROGRAM
In addition to the investments described in the Fund's prospectus, the
Fund may invest in the following:
PAGE 11
Types of Securities
Hybrid Instruments
The Fund may invest up to 10% of its total assets in 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
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.
PAGE 12
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
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.
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
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
PAGE 13
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 Corporation, P1 by Moody's
Investors Service, Inc., or the equivalent rating by T. Rowe Price. At that
time, the bank or securities dealer agrees to repurchase the underlying
security at the same price, plus specified interest. Repurchase agreements
are generally for a short period of time, often less than a week. 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.
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
PAGE 14
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
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
PAGE 15
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.
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
PAGE 16
(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
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
PAGE 17
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.
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
PAGE 18
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
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.
PAGE 19
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 financial futures contracts, including stock
index, interest rate and currency futures ("futures or futures contracts").
Stock index futures contracts may be used to provide a hedge for a
portion of the Fund's portfolio, as a cash management tool, or as an efficient
way for T. Rowe Price to implement either an increase or decrease in portfolio
market exposure in response to changing market conditions. Stock index
futures contracts are currently traded with respect to the S&P 500 Index and
other broad stock market indices, such as the New York Stock Exchange
Composite Stock Index and the Value Line Composite Stock Index. The Fund may,
however, purchase or sell futures contracts with respect to any stock index.
Nevertheless, to hedge the Fund's portfolio successfully, the Fund must sell
futures contacts with respect to indices or subindices whose movements will
have a significant correlation with movements in the prices of the Fund's
portfolio securities.
Interest rate or currency futures contracts may be used as a hedge
against changes in prevailing levels of interest rates or currency exchange
rates in order to establish more definitely the effective return on securities
or currencies held or intended to be acquired by the Fund. In this regard,
the Fund could sell interest rate or currency futures as an offset against the
effect of expected increases in interest rates or currency exchange rates and
purchase such futures as an offset against the effect of expected declines in
interest rates or currency exchange rates.
The Fund will enter into futures contracts which are traded on national
or foreign futures exchanges, and are standardized as to maturity date and
underlying financial instrument. The principal futures exchanges in the
United States are the Board of Trade of the City of Chicago, the Chicago
Mercantile Exchange, the New York Futures Exchange, and the Kansas City Board
of Trade. Futures exchanges and trading in the United States are regulated
under the Commodity Exchange Act by the Commodity Futures Trading Commission
("CFTC"). Futures are traded in London at the London International Financial
Futures Exchange in Paris at the MATIF and in Tokyo at the Tokyo Stock
Exchange. Although techniques other than the sale and purchase of futures
contracts could be used for the above-referenced purposes, futures contracts
offer an effective and relatively low cost means of implementing the Fund's
objectives in these areas.
PAGE 20
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.
The Fund may not enter into futures contracts or options thereon 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 on
the Fund's existing futures and premiums paid for options on futures 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.
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 call options thereon or the writing of put options
thereon by the Fund, an amount of cash, U.S. government securities or other
liquid, high-grade debt obligations, equal to the market value of the futures
contracts and options thereon (less any related margin deposits), will be
identified in an account with the Fund's custodian to cover the position, or
alternative cover will be employed.
In addition, CFTC regulations may impose limitations on the Fund's
ability to engage in certain risk management strategies. If the CFTC or other
regulatory authorities adopt different (including less stringent) or
additional restrictions, the Fund would comply with such new restrictions.
Trading in Futures Contracts
A futures contract provides for the future sale by one party and
purchase by another party of a specified amount of a specific financial
instrument (e.g., units of a debt security) for a specified price, date, time
and place designated at the time the contract is made. Brokerage fees are
incurred when a futures contract is bought or sold and margin deposits must be
maintained. Entering into a contract to buy is commonly referred to as buying
or purchasing a contract or holding a long position. Entering into a contract
to sell is commonly referred to as selling a contract or holding a short
position.
Unlike when the Fund purchases or sells a security, no price would be
paid or received by the Fund upon the purchase or sale of a futures contract.
Upon entering into a futures contract, and to maintain the Fund's open
positions in futures contracts, the Fund would be required to deposit with its
custodian in a segregated account in the name of the futures broker an amount
of cash, U.S. government securities, suitable money market instruments, or
liquid, high-grade debt securities, known as "initial margin." The margin
required for a particular futures contract is set by the exchange on which the
contract is traded, and may be significantly modified from time to time by the
exchange during the term of the contract. Futures contracts are customarily
purchased and sold on margins that may range upward from less than 5% of the
value of the contract being traded.
PAGE 21
If the price of an open futures contract changes (by increase in the
case of a sale or by decrease in the case of a purchase) so that the loss on
the futures contract reaches a point at which the margin on deposit does not
satisfy margin requirements, the broker will require an increase in the
margin. However, if the value of a position increases because of favorable
price changes in the futures contract so that the margin deposit exceeds the
required margin, the broker will pay the excess to the Fund.
These subsequent payments, called "variation margin," to and from the
futures broker, are made on a daily basis as the price of the underlying
assets fluctuate making the long and short positions in the futures contract
more or less valuable, a process known as "marking to the market." The Fund
expects to earn interest income on its margin deposits.
Although certain futures contracts, by their terms, require actual
future delivery of and payment for the underlying instruments in practice most
futures contracts are usually closed out before the delivery date. Closing
out an open futures contract purchase or sale is effected by entering into an
offsetting futures contract purchase or sale, respectively, for the same
aggregate amount of the identical securities and the same delivery date. If
the offsetting purchase price is less than the original sale price, the Fund
realizes a gain; if it is more, the Fund realizes a loss. Conversely, if the
offsetting sale price is more than the original purchase price, the Fund
realizes a gain; if it is less, the Fund realizes a loss. The transaction
costs must also be included in these calculations. There can be no assurance,
however, that the Fund will be able to enter into an offsetting transaction
with respect to a particular futures contract at a particular time. If the
Fund is not able to enter into an offsetting transaction, the Fund will
continue to be required to maintain the margin deposits on the futures
contract.
For example, the Standard & Poor's 500 Stock Index is composed of 500
selected common stocks, most of which are listed on the New York Stock
Exchange. The S&P 500 Index assigns relative weightings to the common stocks
included in the Index, and the Index fluctuates with changes in the market
values of those common stocks. In the case of the S&P 500 Index, contracts
are to buy or sell 500 units. Thus, if the value of the S&P 500 Index were
$150, one contract would be worth $75,000 (500 units x $150). The stock index
futures contract specifies that no delivery of the actual stock making up the
index will take place. Instead, settlement in cash occurs. Over the life of
the contract, the gain or loss realized by the Fund will equal the difference
between the purchase (or sale) price of the contract and the price at which
the contract is terminated. For example, if the Fund enters into a futures
contract to buy 500 units of the S&P 500 Index at a specified future date at a
contract price of $150 and the S&P 500 Index is at $154 on that future date,
the Fund will gain $2,000 (500 units x gain of $4). If the Fund enters into a
futures contract to sell 500 units of the stock index at a specified future
date at a contract price of $150 and the S&P 500 Index is at $152 on that
future date, the Fund will lose $1,000 (500 units x loss of $2).
Special Risks of Transactions in Futures Contracts
Volatility and Leverage. The prices of futures contracts are volatile
and are influenced, among other things, by actual and anticipated changes in
the market and interest rates, which in turn are affected by fiscal and
PAGE 22
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 increase exposure
represented by short futures positions. The Fund may close its positions by
taking opposite positions which would operate to terminate the Fund's position
in the futures contracts. Final determinations of variation margin would then
be made, additional cash would be required to be paid by or released to the
Fund, and the Fund would realize a loss or a gain.
Futures contracts may be closed out only on the exchange or board of
trade where the contracts were initially traded. Although the Fund intends to
purchase or sell futures contracts only on exchanges or boards of trade where
there appears to be an active market, there is no assurance that a liquid
market on an exchange or board of trade will exist for any particular contract
at any particular time. In such event, it might not be possible to close a
futures contract, and in the event of adverse price movements, the Fund would
continue to be required to make daily cash payments of variation margin.
However, in the event futures contracts have been used to hedge the underlying
instruments, the Fund would continue to hold the underlying instruments
subject to the hedge until the futures contracts could be terminated. In such
circumstances, an increase in the price of underlying instruments, if any,
PAGE 23
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
underlying instruments on which the futures are written might advance and the
value of the underlying instruments held in the Fund's portfolio might
decline. If this were to occur, the Fund would lose money on the futures and
also would experience a decline in value in its underlying instruments.
However, while this might occur to a certain degree, T. Rowe Price believes
that over time the value of the Fund's portfolio will tend to move in the same
direction as the market indices which are intended to correlate to the price
movements of the underlying instruments sought to be hedged. It is also
possible that if the Fund were to hedge against the possibility of a decline
in the market (adversely affecting the underlying instruments held in its
portfolio) and prices instead increased, the Fund would lose part or all of
the benefit of increased value of those underlying instruments that it has
hedged, because it would have offsetting losses in its futures positions. In
addition, in such situations, if the Fund had insufficient cash, it might have
to sell underlying instruments to meet daily variation margin requirements.
Such sales of underlying instruments might be, but would not necessarily be,
at increased prices (which would reflect the rising market). The Fund might
have to sell underlying instruments at a time when it would be disadvantageous
to do so.
In addition to the possibility that there might be an imperfect
correlation, or no correlation at all, between price movements in the futures
contracts and the portion of the portfolio being hedged, the price movements
of futures contracts might not correlate perfectly with price movements in the
underlying instruments due to certain market distortions. First, all
participants in the futures market are subject to margin deposit and
maintenance requirements. Rather than meeting additional margin deposit
requirements, investors might close futures contracts through offsetting
transactions which could distort the normal relationship between the
underlying instruments and futures markets. Second, the margin requirements
in the futures market are less onerous than margin requirements in the
securities markets, and as a result the futures market might attract more
speculators than the securities markets do. Increased participation by
speculators in the futures market might also cause temporary price
distortions. Due to the possibility of price distortion in the futures market
PAGE 24
and also because of the imperfect correlation between price movements in the
underlying instruments and movements in the prices of futures contracts, even
a correct forecast of general market trends by T. Rowe Price might not result
in a successful hedging transaction over a very short time period.
Options on Futures Contracts
Options on futures are similar to options on underlying instruments
except that options on futures give the purchaser the right, in return for the
premium paid, to assume a position in a futures contract (a long position if
the option is a call and a short position if the option is a put), rather than
to purchase or sell the futures contract, at a specified exercise price at any
time during the period of the option. Upon exercise of the option, the
delivery of the futures position by the writer of the option to the holder of
the option will be accompanied by the delivery of the accumulated balance in
the writer's futures margin account which represents the amount by which the
market price of the futures contract, at exercise, exceeds (in the case of a
call) or is less than (in the case of a put) the exercise price of the option
on the futures contract. Alternatively, settlement may be made totally in
cash. Purchasers of options who fail to exercise their options prior to the
exercise date suffer a loss of the premium paid.
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 Fund may seek 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. The ability
to establish and close out positions on such options will be subject to the
maintenance of a liquid secondary market. Reasons for the absence of a liquid
secondary market on an exchange include the following: (i) there may be
insufficient trading interest in certain options; (ii) restrictions may be
imposed by an exchange on opening transactions or closing transactions or
both; (iii) trading halts, suspensions or other restrictions may be imposed
with respect to particular classes or series of options, or underlying
instruments; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or a clearing
corporation may not at all times be adequate to handle current trading volume;
or (vi) one or more exchanges could, for economic or other reasons, decide or
be compelled at some future date to discontinue the trading of options (or a
particular class or series of options), in which event the secondary market on
that exchange (or in the class or series of options) would cease to exist,
although outstanding options on the exchange that had been issued by a
clearing corporation as a result of trades on that exchange would continue to
be exercisable in accordance with their terms. There is no assurance that
higher than anticipated trading activity or other unforeseen events might not,
at times, render certain of the facilities of any of the clearing corporations
PAGE 25
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 Futures and Options
Participation in foreign futures and foreign options transactions
involves the execution and clearing of trades on or subject to the rules of a
foreign board of trade. Neither the National Futures Association nor any
domestic exchange regulates activities of any foreign boards of trade,
including the execution, delivery and clearing of transactions, or has the
power to compel enforcement of the rules of a foreign board of trade or any
applicable foreign law. This is true even if the exchange is formally linked
to a domestic market so that a position taken on the market may be liquidated
by a transaction on another market. Moreover, such laws or regulations will
vary depending on the foreign country in which the foreign futures or foreign
options transaction occurs. For these reasons, customers who trade foreign
futures or foreign options contracts may not be afforded certain of the
protective measures provided by the Commodity Exchange Act, the CFTC's
regulations and the rules of the National Futures Association and any domestic
exchange, including the right to use reparations proceedings before the
Commission and arbitration proceedings provided by the National Futures
Association or any domestic futures exchange. In particular, funds received
from customers for foreign futures or foreign options transactions may not be
provided the same protections as funds received in respect of transactions on
United States futures exchanges. In addition, the price of any foreign
futures or foreign options contract and, therefore, the potential profit and
loss thereon may be affected by any variance in the foreign exchange rate
between the time your order is placed and the time it is liquidated, offset or
exercised.
Foreign Currency Transactions
A forward foreign currency exchange contract involves an obligation to
purchase or sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract agreed upon by the parties, at a
price set at the time of the contract. These contracts are principally traded
in the interbank market conducted directly between currency traders (usually
large, commercial banks) and their customers. A forward contract generally
has no deposit requirement, and no commissions are charged at any stage for
trades.
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
PAGE 26
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
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. T. Rowe Price does not intend to enter into
such forward contracts under this second circumstance if, as a result, the
Fund will have more than 30% of the value of its net assets committed to the
consummation of such contracts. Other than as set forth above, and
immediately below, the Fund will also not enter into such forward contracts or
maintain a net exposure to such contracts where the consummation of the
contracts would obligate the Fund to deliver an amount of foreign currency in
excess of the value of the Fund's portfolio securities or other assets
denominated in that currency. The Fund, however, in order to avoid excess
transactions and transaction costs, may maintain a net exposure to forward
contracts in excess of the value of the Fund's portfolio securities or other
assets to which the forward contracts relate (including accrued interest to
the maturity of the forwards on such securities provided the excess amount is
"covered" by liquid, high-grade debt securities, denominated in any currency,
at least equal at all times to the amount of such excess. For these purposes
"the securities or other assets to which the forward contracts relate" may be
securities or assets denominated in a single currency, or where proxy forwards
are used, securities denominated in more than one currency). Under normal
circumstances, consideration of the prospect for currency parities will be
incorporated into the longer term investment decisions made with regard to
overall diversification strategies. However, T. Rowe Price believes that it
is important to have the flexibility to enter into such forward contracts when
it determines that the best interests of the Fund will be served.
Third, the Fund may use forward contracts when the Fund wishes to hedge
out of the dollar into a foreign currency in order to create a synthetic bond
or money market instrument -- the security would be issued in U.S. dollars but
the dollar component would be transformed into a foreign currency through a
forward contract.
PAGE 27
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.
As indicated above, it is impossible to forecast with absolute
precision the market value of portfolio securities at the expiration of the
forward contract. Accordingly, it may be necessary for the Fund to purchase
additional foreign currency on the spot market (and bear the expense of such
purchase) if the market value of the security is less than the amount of
foreign currency the Fund is obligated to deliver and if a decision is made to
sell the security and make delivery of the foreign currency. Conversely, it
may be necessary to sell on the spot market some of the foreign currency
received upon the sale of the portfolio security if its market value exceeds
the amount of foreign currency the Fund is obligated to deliver. However, as
noted, in order to avoid excessive transactions and transaction costs, the
Fund may use liquid, high-grade debt securities denominated in any currency,
to cover the amount by which the value of a forward contract exceeds the value
of the securities to which it relates.
If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss (as described below) to the
extent that there has been movement in forward contract prices. If the Fund
engages in an offsetting transaction, it may subsequently enter into a new
forward contract to sell the foreign currency. Should forward prices decline
during the period between the Fund's entering into a forward contract for the
sale of a foreign currency and the date it enters into an offsetting contract
for the purchase of the foreign currency, the Fund will realize a gain to the
extent the price of the currency it has agreed to sell exceeds the price of
the currency it has agreed to purchase. Should forward prices increase, the
Fund will suffer a loss to the extent of the price of the currency it has
agreed to purchase exceeds the price of the currency it has agreed to sell.
The Fund's dealing in forward foreign currency exchange contracts will
generally be limited to the transactions described above. However, the Fund
reserves the right to enter into forward foreign currency contracts for
different purposes and under different circumstances. Of course, the Fund is
not required to enter into forward contracts with regard to its foreign
currency-denominated securities and will not do so unless deemed appropriate
by T. Rowe Price. It also should be realized that this method of hedging
against a decline in the value of a currency does not eliminate fluctuations
in the underlying prices of the securities. It simply establishes a rate of
exchange at a future date. Additionally, although such contracts tend to
minimize the risk of loss due to a decline in the value of the hedged
currency, at the same time, they tend to limit any potential gain which might
result from an increase in the value of that currency.
Although the Fund values its assets daily in terms of U.S. dollars, it
does not intend to convert its holdings of foreign currencies into U.S.
dollars on a daily basis. It will do so from time to time, and investors
should be aware of the costs of currency conversion. Although foreign
exchange dealers do not charge a fee for conversion, they do realize a profit
based on the difference (the "spread") between the prices at which they are
buying and selling various currencies. Thus, a dealer may offer to sell a
foreign currency to the Fund at one rate, while offering a lesser rate of
exchange should the Fund desire to resell that currency to the dealer.
PAGE 28
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
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.
PAGE 29
Other Investments
Although the Fund's assets are invested primarily in common stocks, the
Fund may invest in convertible securities, corporate and municipal debt
securities, preferred stocks, U.S. traded, dollar-denominated securities of
foreign issuers, and nondollar-denominated fixed income securities, which hold
the prospect of contributing to the achievement of the Fund's objectives,
particularly the current income objective. The Fund may purchase corporate
debt securities within the four highest credit categories assigned by
established public rating agencies, which include both high and medium quality
investment grade corporate debt securities. Medium quality securities (rated
BBB by Moody's Investors Service, Inc. ("Moody's") or Baa by Standard & Poor's
Corporation ("S&P"), or unrated securities of equivalent quality) are regarded
as having an adequate capacity to pay principal and interest, although adverse
economic conditions or changing circumstances are more likely to lead to a
weakening of such capacity than for bonds in the A category. In addition, the
Fund may, from time to time, purchase corporate debt securities that are below
investment grade (i.e., those rated below BBB by Moody's, or below Baa by S&P,
or unrated securities of equivalent quality as determined by T. Rowe Price).
The purchase of such lower quality securities will be limited to 10% of the
Fund's total assets. Such bonds are regarded, on balance, as having
speculative elements with respect to the issuer's capacity to pay interest and
repay principal in accordance with the terms of the obligation. While lower
quality securities generally provide greater income and increased opportunity
for capital appreciation than investments in medium and high quality
securities, such securities also typically entail greater price volatility and
principal and income risk. The above described quality standards will not be
applied to the Fund's investments in convertible securities.
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 purchase the
securities of any issuer (other than obligations issued or guaranteed by the
U.S. government, its agencies or instrumentalities) if, as a result:
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
PAGE 30
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;
(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
PAGE 31
securities in the ordinary course of pursuing its investment
program.
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 they apply for and receive 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.
For purposes of investment restriction (3), U.S., state or local
governments, or related agencies or instrumentalities, are not
considered an industry.
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 may result from 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
PAGE 32
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;
(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
PAGE 33
achieve the economies of scale associated with having a Master fund make
investments in portfolio companies on behalf of a number of Feeder funds.
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 ranks mutual funds by
overall performance, investment objectives, and assets; (B) Morningstar, Inc.,
another widely used independent research firm which rates mutual funds; or (C)
other financial or business publications, such as Business Week, Money
Magazine, Forbes and Barron's, which provide similar information; (iii)
indices of stocks comparable to those in which the Fund invests; (2) the
Consumer Price Index (measure for inflation) may be used to assess the real
rate of return from an investment in the Fund; (3) other government statistics
such as GNP, and net import and export figures derived from governmental
publications, e.g. The Survey of Current Business, may be used to illustrate
investment attributes of the Fund or the general economic, business,
investment, or financial environment in which the Fund operates; (4) the
effect of tax-deferred compounding on the Fund's investment returns, or on
returns in general, may be illustrated by graphs, charts, etc. where such
graphs or charts would compare, at various points in time, the return from an
investment in the Fund (or returns in general) on a tax-deferred basis
(assuming reinvestment of capital gains and dividends and assuming one or more
tax rates) with the return on a taxable basis; and (5) the sectors or
industries in which the Fund invests may be compared to relevant indices or
surveys (e.g. S&P Industry Surveys) in order to evaluate the Fund's historical
performance or current or potential value with respect to the particular
industry or sector.
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
PAGE 34
costs. To explain how the Fund could be used to assist investors in planning
for these goals and to illustrate basic principles of investing, various
worksheets and guides prepared by T. Rowe Price Associates, Inc. and/or T.
Rowe Price Investment Services, Inc. may be made available. These currently
include: the Asset Mix Worksheet which is designed to show shareholders how to
reduce their investment risk by developing a diversified investment plan: the
College Planning Guide which discusses various aspects of financial planning
to meet college expenses and assists parents in projecting the costs of a
college education for their children; the Retirement Planning Kit (also
available in a PC version) which includes a detailed workbook to determine how
much money you may need for retirement and suggests how you might invest to
reach your goal; and the Retirees Financial Guide which includes a detailed
workbook to determine how much money you can afford to spend and still
preserve your purchasing power and suggest how you might invest to reach your
goal. From time to time, other worksheets and guides may be made available as
well. Of course, an investment in the Fund cannot guarantee that such goals
will be met.
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 12/31/92
50 Years 25 Years 10 Years 5 Years
Small company stocks 16.3% 12.4% 11.6% 13.6%
Large company stocks 12.6 10.6 16.2 15.9
Foreign stocks N/A N/A 17.1 1.6
Long-term corporate bonds 5.4 8.8 13.1 12.5
Intermediate-Term U.S.
Gov't. bonds 5.6 9.0 11.0 10.3
Treasury bills 4.6 7.2 6.9 6.3
U.S. inflation 4.3 5.9 3.8 4.2
Source: Ibbotson Associates. Foreign stocks reflect performance of The
Morgan Stanley Capital International EAFE Index, which includes some 1,000
companies representing the stock markets of Europe, Australia, New Zealand,
and the Far East. This chart is for illustrative purposes only and should not
be considered as performance for any T. Rowe Price Fund. Past performance
does not guarantee future results.
Also from time to time, various portfolios demonstrating how these historical
indices would have performed in various combinations over a specified time
period in terms of return may be presented to prospective investors. An
example of this is shown on the next page.
PAGE 35
Performance of Retirement Portfolios*
Asset Mix Annualized Returns Number of Value of
20 Years Years with $10,000
Ending 12/31/92 Negative Investment
Returns After
Period
___________________ _____________________ ________ ________
Best Worst
Portfolio Growth Income Safety Average Year Year
I. Low
Risk 15% 35% 50% 9.0% 19.0% -0.2% 1 $ 56,451
II. Moderate
Risk 55% 30% 15% 10.4% 25.7% -7.5% 2 $ 72,918
III. High
Risk 85% 15% 0% 11.2% 34.5% -16.2% 5 $ 83,382
Source: T. Rowe Price Associates; data supplied by Ibbotson Associates.
* Based on actual performance of stocks (Wilshire 5000), Lehman Brothers
Government/Corporate Bond Index, and Treasury bills from January 1973
through December 1992. Past performance does not guarantee future
results. Figures include changes in principal value and reinvested
dividends. This Exhibit is for illustrative purposes only and is not
representative of the performance of any T. Rowe Price Fund.
Redemptions in Kind
In the unlikely event a shareholder were to receive an in kind
redemption of portfolio securities of the Fund, brokerage fees could be
incurred by the shareholder in a subsequent sale of such securities.
Issuance of Fund Shares for Securities
Transactions involving issuance of a fund's shares for securities or
assets other than cash will be limited to (1) bona fide reorganizations; (2)
statutory mergers; or (3) other acquisitions of portfolio securities that: (a)
meet the investment 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.
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
PAGE 36
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.
*JAMES S. RIEPE, 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.
HENRY H. HOPKINS, Vice President--Managing Director, T. Rowe Price; Vice
President and Director, T. Rowe Price Investment Services, Inc., T. Rowe Price
Services, Inc., and T. Rowe Price Trust Company; Vice President, Rowe Price-
Fleming International, Inc. and T. Rowe Price Retirement Plan Services, Inc.
LENORA V. HORNUNG, Secretary--Vice President, T. Rowe Price
CARMEN F. DEYESU, Treasurer--Vice President, T. Rowe Price, T. Rowe Price
Services, Inc., and T. Rowe Price Trust Company
DAVID S. MIDDLETON, Controller--Vice President, T. Rowe Price, T. Rowe Price
Services, Inc. and T. Rowe Price Trust Company
ROGER L. FIERY, Assistant Vice President--Vice President, T. Rowe Price
Services, Inc. and Rowe Price-Fleming International, Inc.
EDWARD T. SCHNEIDER, Assistant Vice President--Vice President, T. Rowe Price
Services, Inc.
INGRID I. VORDEMBERGE, Assistant Vice President--Employee, T. Rowe Price
The Fund's Executive Committee, comprised of Mr. Riepe, has 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
PAGE 37
permitting T. Rowe Price's employees to serve as officers, directors, and
committee members of the Fund without cost to the Fund.
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.
PAGE 38
The Underwriting Agreement provides that Investment Services will pay
all fees and expenses in connection with: printing and distributing
prospectuses and reports for use in offering and selling Fund shares;
preparing, setting in type, printing, and mailing all sales literature and
advertising; Investment Services' federal and state registrations as a
broker-dealer; and offering and selling Fund shares, except for those fees and
expenses specifically assumed by the Fund. Investment Services' expenses are
paid by T. Rowe Price.
Investment Services acts as the agent of the Fund in connection with the
sale of 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 securities and cash, but it does not participate in the Fund's
investment decisions. Portfolio securities purchased in the U.S. are
maintained in the custody of the Bank and may be entered into the Federal
Reserve Book Entry System, or the security depository system of the Depository
Trust Corporation. The Bank and Fund have entered into a Sub-Custodian
Agreement with The Chase Manhattan Bank, N.A., London, pursuant to which
portfolio securities which are purchased outside the United States are
maintained in the custody of various foreign branches 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
PAGE 39
broker-dealers to execute the Fund's portfolio transactions, consideration is
given to such factors as the price of the security, the rate of the
commission, the size and difficulty of the order, the reliability, integrity,
financial condition, general execution and operational capabilities of
competing brokers and dealers, and brokerage and research services provided by
them. It is not the policy of T. Rowe Price to seek the lowest available
commission rate where it is believed that a broker or dealer charging a higher
commission rate would offer greater reliability or provide better price or
execution.
Fixed Income Securities
Fixed income securities are generally purchased from the issuer or a
primary market-maker acting as principal for the securities on a net basis,
with no brokerage commission being paid by the client. Transactions placed
through dealers serving as primary market-makers reflect the spread between
the bid and asked prices. Securities may also be purchased from underwriters
at prices which include underwriting fees.
With respect to equity and fixed income securities, T. Rowe Price may
effect principal transactions on behalf of the Fund with a broker or dealer
who furnishes brokerage and/or research services, designate any such broker or
dealer to receive selling concessions, discounts or other allowances, or
otherwise deal with any such broker or dealer in connection with the
acquisition of securities in underwritings.
How Evaluations are Made of the Overall Reasonableness of Brokerage
Commissions Paid
On a continuing basis, T. Rowe Price seeks to determine what levels of
commission rates are reasonable in the marketplace for transactions executed
on behalf of the Fund. In evaluating the reasonableness of commission rates,
T. Rowe Price considers: (a) historical commission rates, both before and
since rates have been fully negotiable; (b) rates which other institutional
investors are paying, based on available public information; (c) rates quoted
by brokers and dealers; (d) the size of a particular transaction, in terms of
the number of shares, dollar amount, and number of clients involved; (e) the
complexity of a particular transaction in terms of both execution and
settlement; (f) the level and type of business done with a particular firm
over a period of time; and (g) the extent to which the broker or dealer has
capital at risk in the transaction.
Description of Research Services Received from Brokers and Dealers
T. Rowe Price receives a wide range of research services from brokers
and dealers. These services include information on the economy, industries,
groups of securities, individual companies, statistical information,
accounting and tax law interpretations, political developments, legal
developments affecting portfolio securities, technical market action, pricing
and appraisal services, credit analysis, risk measurement analysis,
performance analysis and analysis of corporate responsibility issues. These
services provide both domestic and international perspective. Research
services are received primarily in the form of written reports, computer
generated services, telephone contacts and personal meetings with security
analysts. In addition, such services may be provided in the form of meetings
arranged with corporate and industry spokespersons, economists, academicians
PAGE 40
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 who provide quality execution services also furnish
research services to T. Rowe Price. In order to be assured of continuing to
receive research services considered of value to its clients, T. Rowe Price
has adopted a brokerage allocation policy embodying the concepts of Section
28(e) of the Securities Exchange Act of 1934, which permits an investment
adviser to cause an account to pay commission rates in excess of those another
broker or dealer would have charged for effecting the same transaction, if the
adviser determines in good faith that the commission paid is reasonable in
relation to the value of the brokerage and research services provided. The
determination may be viewed in terms of either the particular transaction
involved or the overall responsibilities of the adviser with respect to the
accounts over which it exercises investment discretion. Accordingly, while T.
Rowe Price cannot readily determine the extent to which commission rates or
net prices charged by broker-dealers reflect the value of their research
services, T. Rowe Price would expect to assess the reasonableness of
commissions in light of the total brokerage and research services provided by
each particular broker.
Internal Allocation Procedures
T. Rowe Price has a policy of not precommitting a specific amount of
business to any broker or dealer over any specific time period. Historically,
the majority of brokerage placement has been determined by the needs of a
specific transaction such as market-making, availability of a buyer or seller
of a particular security, or specialized execution skills. However, T. Rowe
Price does have an internal brokerage allocation procedure for that portion of
PAGE 41
its discretionary client brokerage business where special needs do not exist,
or where the business may be allocated among several brokers which are able to
meet the needs of the transaction.
Each year, T. Rowe Price assesses the contribution of the brokerage and
research services provided by brokers, and attempts to allocate a portion of
its brokerage business in response to these assessments. Research analysts,
counselors, various investment committees, and the Trading Department each
seek to evaluate the brokerage and research services they receive from brokers
and make judgments as to the level of business which would recognize such
services. In addition, brokers sometimes suggest a level of business they
would like to receive in return for the various brokerage and research
services they provide. Actual brokerage received by any firm may be less than
the suggested allocations but can, and often does, exceed the suggestions,
because the total brokerage business is allocated on the basis of all the
considerations described above. In no case is a broker excluded from
receiving business from T. Rowe Price because it has not been identified as
providing research services.
Miscellaneous
T. Rowe Price's brokerage allocation policy is consistently applied to
all its fully discretionary accounts, which represent a substantial majority
of all assets under management. Research services furnished by brokers
through which T. Rowe Price effects securities transactions may be used in
servicing all accounts (including non-Fund accounts) managed by T. Rowe Price.
Conversely, research services received from brokers which execute transactions
for the Fund are not necessarily used by T. Rowe Price exclusively in
connection with the management of the Fund.
From time to time, orders for clients may be placed through a
computerized transaction network.
The Fund does not allocate business to any broker-dealer on the basis of
its sales of the Fund's shares. However, this does not mean that broker-
dealers who purchase Fund shares for their clients will not receive business
from the Fund.
Some of T. Rowe Price's other clients have investment objectives
and programs similar to those of the Fund. T. Rowe Price may occasionally
make recommendations to other clients which result in their purchasing or
selling securities simultaneously with the Fund. As a result, the demand for
securities being purchased or the supply of securities being sold may
increase, and this could have an adverse effect on the price of those
securities. It is T. Rowe Price's policy not to favor one client over another
in making recommendations or in placing orders. T. Rowe Price frequently
follows the practice of grouping orders of various clients for execution which
generally results in lower commission rates being attained. In certain cases,
where the aggregate order is executed in a series of transactions at various
prices on a given day, each participating client's proportionate share of such
order reflects the average price paid or received with respect to the total
order. T. Rowe Price has established a general investment policy that it will
ordinarily not make additional purchases of a common stock of a company for
its clients (including the T. Rowe Price Funds) if, as a result of such
purchases, 10% or more of the outstanding common stock of such company would
be held by its clients in the aggregate.
PAGE 42
To the extent possible, T. Rowe Price intends to recapture solicitation
fees paid in connection with tender offers through T. Rowe Price Investment
Services, Inc., the Fund's distributor. At the present time, T. Rowe Price
does not recapture commissions or underwriting discounts or selling group
concessions in connection with taxable securities acquired in underwritten
offerings. T. Rowe Price does, however, attempt to negotiate elimination of
all or a portion of the selling-group concession or underwriting discount when
purchasing tax-exempt municipal securities on behalf of its clients in
underwritten offerings.
Transactions with Related Brokers and Dealers
As provided in the Investment Management Agreement between the Fund and
T. Rowe Price, T. Rowe Price is responsible not only for making decisions with
respect to the purchase and sale of the Fund's portfolio securities, but also
for implementing these decisions, including the negotiation of commissions and
the allocation of portfolio brokerage and principal business. It is expected
that T. Rowe Price may place orders for the Fund's portfolio transactions with
broker-dealers through the same trading desk T. Rowe Price uses for portfolio
transactions in domestic securities. The trading desk accesses brokers and
dealers in various markets in which the Fund's foreign securities are located.
These brokers and dealers may include certain affiliates of Robert Fleming
Holdings Limited ("Robert Fleming Holdings") and Jardine Fleming Group Limited
("JFG"), persons indirectly related to T. Rowe Price. Robert Fleming
Holdings, through Copthall Overseas Limited, a wholly-owned subsidiary, owns
25% of the common stock of Rowe Price-Fleming International, Inc. ("RPFI"), an
investment adviser registered under the Investment Advisers Act of 1940.
Fifty percent of the common stock of RPFI is owned by TRP Finance, Inc., a
wholly-owned subsidiary of T. Rowe Price, and the remaining 25% is owned by
Jardine Fleming Holdings Limited, a subsidiary of JFG. JFG is 50% owned by
Robert Fleming Holdings and 50% owned by Jardine Matheson Holdings Limited.
Orders for the Fund's portfolio transactions placed with affiliates of Robert
Fleming Holdings and JFG will result in commissions being received by such
affiliates.
The Board of Directors of the Fund has authorized T. Rowe Price to
utilize certain affiliates of Robert Fleming and JFG in the capacity of broker
in connection with the execution of the Fund's portfolio transactions. These
affiliates include, but are not limited to, Jardine Fleming Securities Limited
("JFS"), a wholly-owned subsidiary of JFG, Robert Fleming & Co. Limited
("RF&Co."), Jardine Fleming Australia Securities Limited, and Robert Fleming,
Inc. (a New York brokerage firm). Other affiliates of Robert-Fleming Holdings
and JFG also may be used although it does not believe that the Fund's use of
these brokers would be subject to Section 17(e) of the Investment Company Act
of 1940, the Board of Directors of the Fund has agreed that the procedures set
forth in Rule 17(e)(1) under that Act will be followed when using such
brokers.
PRICING OF SECURITIES
Equity securities listed or regularly traded on a securities exchange
(including NASDAQ) are valued at the last quoted sales price on the day the
valuations are made. A security which is listed or traded on more than one
exchange is valued at the quotation on the exchange determined to be the
primary market for such security. Other equity securities and those listed
PAGE 43
securities that are not traded on a particular day are valued at a price
within the limits of the latest bid and asked prices deemed by the Board of
Directors, or by persons delegated by the Board, best to reflect fair value.
Debt securities are generally traded in the over-the-counter market and
are valued at a price deemed best to reflect fair value as quoted by dealers
who make markets in these securities or by an independent pricing service.
Short-term debt securities are valued at their cost in local currency which,
when combined with accrued interest, approximates fair value.
For purposes of determining the Fund's net asset value per share, all
assets and liabilities initially expressed in foreign currencies are converted
into U.S. dollars at the mean of the bid and offer prices of such currencies
against U.S. dollars quoted by a major bank.
Assets and liabilities for which the above valuation procedures are
inappropriate or are deemed not to reflect fair value are stated at fair value
as determined in good faith by or under the supervision of the officers of the
Fund, as authorized by the Board of Directors.
NET ASSET VALUE PER SHARE
The purchase and redemption price of the Fund's shares is equal to the
Fund's net asset value per share or share price. The Fund determines its net
asset value per share by subtracting 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 (1) during which
the NYSE is closed, other than customary weekend and holiday closings, (b)
during which trading on the NYSE is restricted (c) during which an emergency
exists as a result of which disposal by the Fund of securities owned by it is
not reasonably practicable or it is not reasonably practicable for the Fund
fairly to determine the value of its net assets, or (d) during which a
governmental body having jurisdiction over the Fund may by order permit such a
suspension for the protection of the Fund's shareholders; provided that
applicable rules and regulations of the Securities and Exchange Commission (or
any succeeding governmental authority) shall govern as to whether the
conditions prescribed in (b), (c) or (d) exist.
DIVIDENDS
Unless you elect otherwise, dividends and capital gain distributions
will be reinvested on the reinvestment date using the NAV per share of that
date. The reinvestment date normally precedes the payment date by about 10
days although the exact timing is subject to change.
PAGE 44
TAX STATUS
The Fund intends to qualify as a "regulated investment company" under
Subchapter M of the Internal Revenue Code of 1986, as amended.
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. It does not
make any difference whether dividends and capital gain distributions are paid
in cash or in additional shares.
At the time of your purchase, the Fund's net asset value may reflect
undistributed income, capital gains or net unrealized appreciation of
securities held by the Fund which may be a subsequently distributed to you as
either dividends or capital gain distributions. For federal income tax
purposes, the Fund is permitted to carry forward its net realized capital
losses, if any, for eight years, and realize net capital gains up to the
amount of such losses without being required to pay taxes on, or distribute
such gains.
If, in any taxable year, the Fund should not qualify as a regulated
investment company under the Code: (i) the Fund would be 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 taxable to shareholders as ordinary
dividends (regardless of whether they would otherwise have been considered
capital gain dividends).
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. Capital gains on the
sale of such holdings will be deemed to be ordinary income regardless of how
long the Fund holds its investment. In addition to bearing their
proportionate share of the fund's expenses (management fees and operating
expenses) shareholders will also indirectly bear similar expenses of such
funds. In addition, the Fund may be subject to corporate income tax and an
interest charge on certain dividends and capital gains earned from these
investments, regardless of whether such income and gains are distributed to
shareholders.
In accordance with tax regulations, the Fund intends to treat these
securities as sold on the last day of the Fund's fiscal year and recognize any
gains for tax purposes at that time; losses will not be recognized. Such
gains will be considered ordinary income which the Fund will be required to
distribute even though it has not sold the security and received cash to pay
such distributions.
PAGE 45
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
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.
Each insurance company, as the Shareholder, is entitled to one vote for
each full share held (and fractional votes for fractional shares held) and
will vote in the election of or removal of directors (to the extent
hereinafter provided) and on other matters submitted to the vote of the
Shareholder. However, the insurance company may pass through voting rights to
PAGE 46
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. Under state
insurance law, there are certain circumstances under which the insurance
companies may disregard such voting instructions. If voting instructions are
ever so ignored, Contract Holders or Participants will be advised of that
action in the next semi-annual report.
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
_______________________, ________________________, are independent
accountants to the Fund. The Statement of Assets and Liabilities of the Fund
as of March __, 1994, included in the Statement of Additional Information, has
been included in reliance on the report of _____________, given on the
authority of said firm as experts in auditing and accounting.
PAGE 47
RATINGS OF CORPORATE DEBT SECURITIES
Moody's Investors Services, Inc. (Moody's)
Aaa-Bonds rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge."
Aa-Bonds rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high
grade bonds.
A-Bonds rated A possess many favorable investment attributes and are to
be considered as upper medium grade obligations.
Baa-Bonds rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba-Bonds rated Ba are judged to have speculative elements: their futures
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterize bonds in this class.
B-Bonds rated B generally lack the characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa-Bonds rated Caa are of poor standing. Such issues may be in default
or there may be present elements of danger with respect to principal or
interest.
Ca-Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked short-comings.
Standard & Poor's Corporation (S&P)
AAA-This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA-Bonds rated AA also qualify as high-quality debt obligations.
Capacity to pay principal and interest is very strong.
A-Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions.
BBB-Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
PAGE 48
likely to lead to a weakened capacity to pay principal and interest for bonds
in this category than for bonds in the A category.
BB, C, CCC, CC-Bonds rated BB, B, CCC, and CC are regarded on balance,
as predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal. BB indicates the lowest degree of speculation
and CC the highest degree of speculation. While such bonds will likely have
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
Fitch Investors Service, Inc.
AAA-High grade, broadly marketable, suitable for investment by directors
and fiduciary institutions, and liable to but slight market fluctuation other
than through changes in the money rate. The prime feature of a "AAA" bond is
the showing of earnings several times or many times interest requirements for
such stability of applicable interest that safety is beyond reasonable
question whenever changes occur in conditions. Other features may enter, such
as a wide margin of protection through collateral, security or direct lien on
specific property. Sinking funds or voluntary reduction of debt by call or
purchase or often factors, while guarantee or assumption by parties other than
the original debtor may influence their rating.
AA-Of safety virtually beyond question and readily salable. Their
merits are not greatly unlike those of "AAA" class but a bond so rated may be
junior though of strong lien, or the margin of safety is less strikingly
broad. The issue may be the obligation of a small company, strongly secured,
but influenced as to rating by the lesser financial power of the enterprise
and more local type of market.
PAGE 49
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 are currently being offered to insurance
company separate accounts established for the purpose of funding variable
annuity contracts. Variable annuity Contract Holders or Participants are not
the shareholders of the Fund. Rather, the separate account is the
shareholder, although voting rights may be passed through to Contract Holders
or Participants. The variable annuity contracts are described in separate
prospectuses issued by the insurance companies. The Fund assumes no
responsibility for such prospectuses.
In the future, it is possible that the Fund may offer its shares
to separate accounts funding variable annuities 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 April 4, 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 April 4,
1993.
PAGE 50
TABLE OF CONTENTS
Page Page
Capital Stock. . . . . . . . . . Investment Program. . . . . . . .
Custodian. . . . . . . . . . . . (page __ in Prospectus)
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 Services . Principal Holders of Securities .
(pages __ and __ in Prospectus) Repurchase Agreements . . . . . .
Investment Objective and Risk Factors. . . . . . . . . . .
Program (page __ in Prospectus) Tax Status. . . . . . . . . . . .
Investment Objective and . . . . (page __ in Prospectus)
Policies The Service Economy . . . . . . .
Investment Performance . . . . .
INVESTMENT OBJECTIVE AND POLICIES
The following information supplements the discussion of the Fund's
investment objective and policies discussed on pages __, and __ through __ of
the prospectus. Unless otherwise specified, the investment program and
restrictions of the Fund are not fundamental policies. The operating policies
of the Fund are subject to change by its Board of Directors without
shareholder approval. However, shareholders will be notified of a material
change in an operating policy. The fundamental policies of the Fund may not
be changed without the approval of at least a majority of the outstanding
shares of the Fund or, if it is less, 67% of the shares represented at a
meeting of shareholders at which the holders of 50% or more of the shares are
represented.
INVESTMENT 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 51
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
The Fund may invest in U.S. dollar-denominated and non U.S.
dollar-denominated securities of foreign issuers. The Fund currently intends
to limit its non-dollar denominated equity securities to 10% of total assets.
Because the Fund may invest in foreign securities, investment in
the Fund involves risks that are different in some respects from an investment
in a fund which invests only in securities of U.S. domestic issuers. Foreign
investments may be affected favorably or unfavorably by changes in currency
rates and exchange control regulations. There may be less publicly available
information about a foreign company than about a U.S. company, and foreign
companies may not be subject to accounting, auditing, and financial reporting
standards and requirements comparable to those applicable to U.S. companies.
There may be less governmental supervision of securities markets, brokers and
issuers of securities. Securities of some foreign companies are less liquid
or more volatile than securities of U.S. companies, and foreign brokerage
commissions and custodian fees are generally higher than in the United States.
Settlement practices may include delays and may differ from those customary in
United States markets. Investments in foreign securities may also be subject
to other risks different from those affecting U.S. investments, including
local political or economic developments, expropriation or nationalization of
assets, restrictions on foreign investment and repatriation of capital,
imposition of withholding taxes on dividend or interest payments, currency
blockage (which would prevent cash from being brought back to the United
States), and difficulty in enforcing legal rights outside the U.S.
INVESTMENT PROGRAM
In addition to the investments described in the Fund's prospectus,
the Fund may invest in the following:
PAGE 52
Type of Securities
Hybrid Instruments
The Fund may invest up to 10% of its total assets in 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
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.
PAGE 53
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
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.
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
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
PAGE 54
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 Corporation, P1 by Moody's
Investors Service, Inc., or the equivalent rating by T. Rowe Price. At that
time, the bank or securities dealer agrees to repurchase the underlying
security at the same price, plus specified interest. Repurchase agreements
are generally for a short period of time, often less than a week. 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.
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
PAGE 55
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 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
PAGE 56
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.
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
PAGE 57
(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 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
PAGE 58
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.
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
PAGE 59
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
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.
PAGE 60
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 financial futures contracts, including
stock index, interest rate and currency futures ("futures or futures
contracts").
Stock index futures contracts may be used to provide a hedge for a
portion of the Fund's portfolio, as a cash management tool, or as an efficient
way for T. Rowe Price to implement either an increase or decrease in portfolio
market exposure in response to changing market conditions. Stock index
futures contracts are currently traded with respect to the S&P 500 Index and
other broad stock market indices, such as the New York Stock Exchange
Composite Stock Index and the Value Line Composite Stock Index. The Fund may,
however, purchase or sell futures contracts with respect to any stock index.
Nevertheless, to hedge the Fund's portfolio successfully, the Fund must sell
futures contacts with respect to indices or subindices whose movements will
have a significant correlation with movements in the prices of the Fund's
portfolio securities.
Interest rate or currency futures contracts may be used as a hedge
against changes in prevailing levels of interest rates or currency exchange
rates in order to establish more definitely the effective return on securities
or currencies held or intended to be acquired by the Fund. In this regard,
the Fund could sell interest rate or currency futures as an offset against the
effect of expected increases in interest rates or currency exchange rates and
purchase such futures as an offset against the effect of expected declines in
interest rates or currency exchange rates.
The Fund will enter into futures contracts which are traded on
national or foreign futures exchanges, and are standardized as to maturity
date and underlying financial instrument. The principal futures exchanges in
the United States are the Board of Trade of the City of Chicago, the Chicago
Mercantile Exchange, the New York Futures Exchange, and the Kansas City Board
of Trade. Futures exchanges and trading in the United States are regulated
under the Commodity Exchange Act by the Commodity Futures Trading Commission
("CFTC"). Futures are traded in London at the London International Financial
Futures Exchange in Paris at the MATIF and in Tokyo at the Tokyo Stock
Exchange. Although techniques other than the sale and purchase of futures
contracts could be used for the above-referenced purposes, futures contracts
offer an effective and relatively low cost means of implementing the Fund's
objectives in these areas.
PAGE 61
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.
The Fund may not enter into futures contracts or options thereon
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 on
the Fund's existing futures and premiums paid for options on futures 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.
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 call options thereon or the writing of put options
thereon by the Fund, an amount of cash, U.S. government securities or other
liquid, high-grade debt obligations, equal to the market value of the futures
contracts and options thereon (less any related margin deposits), will be
identified in an account with the Fund's custodian to cover the position, or
alternative cover will be employed.
In addition, CFTC regulations may impose limitations on the Fund's
ability to engage in certain risk management strategies. If the CFTC or other
regulatory authorities adopt different (including less stringent) or
additional restrictions, the Fund would comply with such new restrictions.
Trading in Futures Contracts
A futures contract provides for the future sale by one party and
purchase by another party of a specified amount of a specific financial
instrument (e.g., units of a debt security) for a specified price, date, time
and place designated at the time the contract is made. Brokerage fees are
incurred when a futures contract is bought or sold and margin deposits must be
maintained. Entering into a contract to buy is commonly referred to as buying
or purchasing a contract or holding a long position. Entering into a contract
to sell is commonly referred to as selling a contract or holding a short
position.
Unlike when the Fund purchases or sells a security, no price would
be paid or received by the Fund upon the purchase or sale of a futures
contract. Upon entering into a futures contract, and to maintain the Fund's
open positions in futures contracts, the Fund would be required to deposit
with its custodian in a segregated account in the name of the futures broker
an amount of cash, U.S. government securities, suitable money market
instruments, or liquid, high-grade debt securities, known as "initial margin."
The margin required for a particular futures contract is set by the exchange
on which the contract is traded, and may be significantly modified from time
to time by the exchange during the term of the contract. Futures contracts
are customarily purchased and sold on margins that may range upward from less
than 5% of the value of the contract being traded.
PAGE 62
If the price of an open futures contract changes (by increase in
the case of a sale or by decrease in the case of a purchase) so that the loss
on the futures contract reaches a point at which the margin on deposit does
not satisfy margin requirements, the broker will require an increase in the
margin. However, if the value of a position increases because of favorable
price changes in the futures contract so that the margin deposit exceeds the
required margin, the broker will pay the excess to the Fund.
These subsequent payments, called "variation margin," to and from
the futures broker, are made on a daily basis as the price of the underlying
assets fluctuate making the long and short positions in the futures contract
more or less valuable, a process known as "marking to the market." The Fund
expects to earn interest income on its margin deposits.
Although certain futures contracts, by their terms, require actual
future delivery of and payment for the underlying instruments in practice most
futures contracts are usually closed out before the delivery date. Closing
out an open futures contract purchase or sale is effected by entering into an
offsetting futures contract purchase or sale, respectively, for the same
aggregate amount of the identical securities and the same delivery date. If
the offsetting purchase price is less than the original sale price, the Fund
realizes a gain; if it is more, the Fund realizes a loss. Conversely, if the
offsetting sale price is more than the original purchase price, the Fund
realizes a gain; if it is less, the Fund realizes a loss. The transaction
costs must also be included in these calculations. There can be no assurance,
however, that the Fund will be able to enter into an offsetting transaction
with respect to a particular futures contract at a particular time. If the
Fund is not able to enter into an offsetting transaction, the Fund will
continue to be required to maintain the margin deposits on the futures
contract.
For example, the Standard & Poor's 500 Stock Index is composed of
500 selected common stocks, most of which are listed on the New York Stock
Exchange. The S&P 500 Index assigns relative weightings to the common stocks
included in the Index, and the Index fluctuates with changes in the market
values of those common stocks. In the case of the S&P 500 Index, contracts
are to buy or sell 500 units. Thus, if the value of the S&P 500 Index were
$150, one contract would be worth $75,000 (500 units x $150). The stock index
futures contract specifies that no delivery of the actual stock making up the
index will take place. Instead, settlement in cash occurs. Over the life of
the contract, the gain or loss realized by the Fund will equal the difference
between the purchase (or sale) price of the contract and the price at which
the contract is terminated. For example, if the Fund enters into a futures
contract to buy 500 units of the S&P 500 Index at a specified future date at a
contract price of $150 and the S&P 500 Index is at $154 on that future date,
the Fund will gain $2,000 (500 units x gain of $4). If the Fund enters into a
futures contract to sell 500 units of the stock index at a specified future
date at a contract price of $150 and the S&P 500 Index is at $152 on that
future date, the Fund will lose $1,000 (500 units x loss of $2).
Special Risks of Transactions in Futures Contracts
Volatility and Leverage. The prices of futures contracts are
volatile and are influenced, among other things, by actual and anticipated
changes in the market and interest rates, which in turn are affected by fiscal
PAGE 63
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 increase exposure
represented by short futures positions. The Fund may close its positions by
taking opposite positions which would operate to terminate the Fund's position
in the futures contracts. Final determinations of variation margin would then
be made, additional cash would be required to be paid by or released to the
Fund, and the Fund would realize a loss or a gain.
Futures contracts may be closed out only on the exchange or board
of trade where the contracts were initially traded. Although the Fund intends
to purchase or sell futures contracts only on exchanges or boards of trade
where there appears to be an active market, there is no assurance that a
liquid market on an exchange or board of trade will exist for any particular
contract at any particular time. In such event, it might not be possible to
close a futures contract, and in the event of adverse price movements, the
Fund would continue to be required to make daily cash payments of variation
margin. However, in the event futures contracts have been used to hedge the
underlying instruments, the Fund would continue to hold the underlying
instruments subject to the hedge until the futures contracts could be
PAGE 64
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 underlying instruments on which the futures are written
might advance and the value of the underlying instruments held in the Fund's
portfolio might decline. If this were to occur, the Fund would lose money on
the futures and also would experience a decline in value in its underlying
instruments. However, while this might occur to a certain degree, T. Rowe
Price believes that over time the value of the Fund's portfolio will tend to
move in the same direction as the market indices which are intended to
correlate to the price movements of the underlying instruments sought to be
hedged. It is also possible that if the Fund were to hedge against the
possibility of a decline in the market (adversely affecting the underlying
instruments held in its portfolio) and prices instead increased, the Fund
would lose part or all of the benefit of increased value of those underlying
instruments that it has hedged, because it would have offsetting losses in its
futures positions. In addition, in such situations, if the Fund had
insufficient cash, it might have to sell underlying instruments to meet daily
variation margin requirements. Such sales of underlying instruments might be,
but would not necessarily be, at increased prices (which would reflect the
rising market). The Fund might have to sell underlying instruments at a time
when it would be disadvantageous to do so.
In addition to the possibility that there might be an imperfect
correlation, or no correlation at all, between price movements in the futures
contracts and the portion of the portfolio being hedged, the price movements
of futures contracts might not correlate perfectly with price movements in the
underlying instruments due to certain market distortions. First, all
participants in the futures market are subject to margin deposit and
maintenance requirements. Rather than meeting additional margin deposit
requirements, investors might close futures contracts through offsetting
transactions which could distort the normal relationship between the
underlying instruments and futures markets. Second, the margin requirements
in the futures market are less onerous than margin requirements in the
securities markets, and as a result the futures market might attract more
speculators than the securities markets do. Increased participation by
PAGE 65
speculators in the futures market might also cause temporary price
distortions. Due to the possibility of price distortion in the futures market
and also because of the imperfect correlation between price movements in the
underlying instruments and movements in the prices of futures contracts, even
a correct forecast of general market trends by T. Rowe Price might not result
in a successful hedging transaction over a very short time period.
Options on Futures Contracts
Options on futures are similar to options on underlying
instruments except that options on futures give the purchaser the right, in
return for the premium paid, to assume a position in a futures contract (a
long position if the option is a call and a short position if the option is a
put), rather than to purchase or sell the futures contract, at a specified
exercise price at any time during the period of the option. Upon exercise of
the option, the delivery of the futures position by the writer of the option
to the holder of the option will be accompanied by the delivery of the
accumulated balance in the writer's futures margin account which represents
the amount by which the market price of the futures contract, at exercise,
exceeds (in the case of a call) or is less than (in the case of a put) the
exercise price of the option on the futures contract. Alternatively,
settlement may be made totally in cash. Purchasers of options who fail to
exercise their options prior to the exercise date suffer a loss of the premium
paid.
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 Fund may seek 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. The ability
to establish and close out positions on such options will be subject to the
maintenance of a liquid secondary market. Reasons for the absence of a liquid
secondary market on an exchange include the following: (i) there may be
insufficient trading interest in certain options; (ii) restrictions may be
imposed by an exchange on opening transactions or closing transactions or
both; (iii) trading halts, suspensions or other restrictions may be imposed
with respect to particular classes or series of options, or underlying
instruments; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or a clearing
corporation may not at all times be adequate to handle current trading volume;
or (vi) one or more exchanges could, for economic or other reasons, decide or
be compelled at some future date to discontinue the trading of options (or a
particular class or series of options), in which event the secondary market on
that exchange (or in the class or series of options) would cease to exist,
although outstanding options on the exchange that had been issued by a
clearing corporation as a result of trades on that exchange would continue to
be exercisable in accordance with their terms. There is no assurance that
PAGE 66
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 Futures and Options
Participation in foreign futures and foreign options transactions
involves the execution and clearing of trades on or subject to the rules of a
foreign board of trade. Neither the National Futures Association nor any
domestic exchange regulates activities of any foreign boards of trade,
including the execution, delivery and clearing of transactions, or has the
power to compel enforcement of the rules of a foreign board of trade or any
applicable foreign law. This is true even if the exchange is formally linked
to a domestic market so that a position taken on the market may be liquidated
by a transaction on another market. Moreover, such laws or regulations will
vary depending on the foreign country in which the foreign futures or foreign
options transaction occurs. For these reasons, customers who trade foreign
futures or foreign options contracts may not be afforded certain of the
protective measures provided by the Commodity Exchange Act, the CFTC's
regulations and the rules of the National Futures Association and any domestic
exchange, including the right to use reparations proceedings before the
Commission and arbitration proceedings provided by the National Futures
Association or any domestic futures exchange. In particular, funds received
from customers for foreign futures or foreign options transactions may not be
provided the same protections as funds received in respect of transactions on
United States futures exchanges. In addition, the price of any foreign
futures or foreign options contract and, therefore, the potential profit and
loss thereon may be affected by any variance in the foreign exchange rate
between the time your order is placed and the time it is liquidated, offset or
exercised.
Foreign Currency Transactions
A forward foreign currency exchange contract involves an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. These contracts are
principally traded in the interbank market conducted directly between currency
traders (usually large, commercial banks) and their customers. A forward
contract generally has no deposit requirement, and no commissions are charged
at any stage for trades.
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:
PAGE 67
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
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. T. Rowe Price does not intend to enter into
such forward contracts under this second circumstance if, as a result, the
Fund will have more than 30% of the value of its net assets committed to the
consummation of such contracts. Other than as set forth above, and
immediately below, the Fund will also not enter into such forward contracts or
maintain a net exposure to such contracts where the consummation of the
contracts would obligate the Fund to deliver an amount of foreign currency in
excess of the value of the Fund's portfolio securities or other assets
denominated in that currency. The Fund, however, in order to avoid excess
transactions and transaction costs, may maintain a net exposure to forward
contracts in excess of the value of the Fund's portfolio securities or other
assets to which the forward contracts relate (including accrued interest to
the maturity of the forwards on such securities provided the excess amount is
"covered" by liquid, high-grade debt securities, denominated in any currency,
at least equal at all times to the amount of such excess. For these purposes
"the securities or other assets to which the forward contracts relate" may be
securities or assets denominated in a single currency, or where proxy forwards
are used, securities denominated in more than one currency). Under normal
circumstances, consideration of the prospect for currency parities will be
incorporated into the longer term investment decisions made with regard to
overall diversification strategies. However, T. Rowe Price believes that it
is important to have the flexibility to enter into such forward contracts when
it determines that the best interests of the Fund will be served.
Third, the Fund may use forward contracts when the Fund wishes to
hedge out of the dollar into a foreign currency in order to create a synthetic
bond or money market instrument -- the security would be issued in U.S.
PAGE 68
dollars but the dollar component would be transformed into a foreign currency
through a forward contract.
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.
As indicated above, it is impossible to forecast with absolute
precision the market value of portfolio securities at the expiration of the
forward contract. Accordingly, it may be necessary for the Fund to purchase
additional foreign currency on the spot market (and bear the expense of such
purchase) if the market value of the security is less than the amount of
foreign currency the Fund is obligated to deliver and if a decision is made to
sell the security and make delivery of the foreign currency. Conversely, it
may be necessary to sell on the spot market some of the foreign currency
received upon the sale of the portfolio security if its market value exceeds
the amount of foreign currency the Fund is obligated to deliver. However, as
noted, in order to avoid excessive transactions and transaction costs, the
Fund may use liquid, high-grade debt securities denominated in any currency,
to cover the amount by which the value of a forward contract exceeds the value
of the securities to which it relates.
If the Fund retains the portfolio security and engages in an
offsetting transaction, the Fund will incur a gain or a loss (as described
below) to the extent that there has been movement in forward contract prices.
If the Fund engages in an offsetting transaction, it may subsequently enter
into a new forward contract to sell the foreign currency. Should forward
prices decline during the period between the Fund's entering into a forward
contract for the sale of a foreign currency and the date it enters into an
offsetting contract for the purchase of the foreign currency, the Fund will
realize a gain to the extent the price of the currency it has agreed to sell
exceeds the price of the currency it has agreed to purchase. Should forward
prices increase, the Fund will suffer a loss to the extent of the price of the
currency it has agreed to purchase exceeds the price of the currency it has
agreed to sell.
The Fund's dealing in forward foreign currency exchange contracts
will generally be limited to the transactions described above. However, the
Fund reserves the right to enter into forward foreign currency contracts for
different purposes and under different circumstances. Of course, the Fund is
not required to enter into forward contracts with regard to its foreign
currency-denominated securities and will not do so unless deemed appropriate
by T. Rowe Price. It also should be realized that this method of hedging
against a decline in the value of a currency does not eliminate fluctuations
in the underlying prices of the securities. It simply establishes a rate of
exchange at a future date. Additionally, although such contracts tend to
minimize the risk of loss due to a decline in the value of the hedged
currency, at the same time, they tend to limit any potential gain which might
result from an increase in the value of that currency.
Although the Fund values its assets daily in terms of U.S.
dollars, it does not intend to convert its holdings of foreign currencies into
U.S. dollars on a daily basis. It will do so from time to time, and investors
should be aware of the costs of currency conversion. Although foreign
exchange dealers do not charge a fee for conversion, they do realize a profit
PAGE 69
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 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
PAGE 70
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;
(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
PAGE 71
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.
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 they apply for and receive 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.
For purposes of investment restriction (3), U.S., state or local
governments, or related agencies or instrumentalities, are not
considered an industry.
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;
PAGE 72
(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 may result from 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;
(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;
PAGE 73
(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.
THE SERVICE ECONOMY
Throughout the last several decades, the U.S. has been undergoing a
transformation from a manufacturing to a service-based economy. While
manufacturing's share of the Gross Domestic Product (GDP) has declined since
World War II, the service sector's share has experienced rapid growth. The
service sector has grown 42% faster than the rest of the economy over the past
30 years, and now accounts for about 50% of our GDP. Importantly, the service
sector has provided 95% of the growth in nonagricultural employment since
1952. Today, more than eight of ten Americans work in service fields. This
shift from companies that produce capital goods to ones that furnish services
generally has provided attractive business and investment opportunities.
PAGE 74
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
PAGE 75
for these goals and to illustrate basic principles of investing, various
worksheets and guides prepared by T. Rowe Price and/or T. Rowe Price
Investment Services, Inc. may be made available. These currently include:
the Asset Mix Worksheet which is designed to show shareholders how to reduce
their investment risk by developing a diversified investment plan; 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 12/31/92
50 years 25 years 10 years 5 years
Small-Company Stocks 16.3% 12.4% 11.6% 13.6%
Large-Company Stocks 12.6 10.6 16.2 15.9
Foreign Stocks N/A N/A 17.1 1.6
Long-Term Corporate Bonds 5.4 8.8 13.1 12.5
Intermediate-Term U.S. Gov't Bonds 5.6 9.0 11.0 10.3
Treasury Bills 4.6 7.2 6.9 6.3
U.S. Inflation 4.3 5.9 3.8 4.2
Sources: Ibbotson Associates. Foreign stocks reflect performance of The
Morgan Stanley Capital International EAFE Index, which includes some 1,000
companies representing the stock markets of Europe, Australia, New Zealand,
and the Far East. This chart is for illustrative purposes only and should not
be considered as performance for any T. Rowe Price Fund. Past performance
does not guarantee future results.
Also from time to time, various portfolios demonstrating how these historical
indices would have performed in various combinations over a specified time
period in terms of return may be presented to prospective investors. An
example of this is shown on the next page.
PAGE 76
Performance Characteristics of Retirement Portfolios*
Asset Mix Annualized Returns Number
20 Years Ending 12/31/92 of Value of
Years $10,000
with Investment
Negative After
Returns Period
_____________________ _______________________ ______ ________
Best Worst
Portfolio Growth Income Safety Average Year Year
_________ ________ ______ ______ _______ _____ _____
I. Low
Risk 15% 35% 50% 9.0% 19.8% -0.2% 1 $ 56,451
II. Moderate
Risk 55% 30% 15% 10.4% 25.7% -7.5% 2 $ 72,918
III. High
Risk 85% 15% 0% 11.2% 34.5% -16.2% 5 $83,382
Source: T. Rowe Price Associates, Inc.; data supplied by Ibbotson Associates.
* Based on actual performance of stocks (Wilshire 5000), Lehman Brothers
Government/Corporate Bond Index, and Treasury bills from January 1973
through December 1992. Past performance does not guarantee future
results. Figures include changes in principal value and reinvested
dividends. This Exhibit is for illustrative purposes only and is not
representative of the performance of any T. Rowe Price Fund.
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.
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
PAGE 77
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.
* JAMES S. RIEPE, 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.
HENRY H. HOPKINS, Vice President--Managing Director, T. Rowe Price; Vice
President and Director, T. Rowe Price Investment Services, Inc., T. Rowe
Price Services, Inc., and T. Rowe Price Trust Company; Vice President, Rowe
Price-Fleming International, Inc. and T. Rowe Price Retirement Plan
Services, Inc.
LENORA V. HORNUNG, Secretary--Vice President of T. Rowe Price
CARMEN F. DEYESU, Treasurer--Vice President, T. Rowe Price, T. Rowe Price
Services, Inc., and T. Rowe Price Trust Company
DAVID S. MIDDLETON, Controller--Vice President, T. Rowe Price, T. Rowe Price
Services, Inc., and T. Rowe Price Trust Company
ROGER L. FIERY, Assistant Vice President--Vice President of Rowe Price-
Fleming International, Inc.
EDWARD T. SCHNEIDER, Assistant Vice President--Vice President of T. Rowe
Price Services, Inc.
INGRID I. VORDEMBERGE, Assistant Vice President--Employee of T. Rowe Price
The Fund's Executive Committee, comprised of Mr. Riepe has 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
PAGE 78
employed by the Fund such as the Fund's custodian and transfer agent;
assisting the Fund in the coordination of such agents' activities; and
permitting T. Rowe Price's employees to serve as officers, directors, and
committee members of the Fund without cost to the Fund.
The 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
PAGE 79
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;
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 securities and cash, but it does not participate in the Fund's
investment decisions. Portfolio securities purchase in the U.S. are
maintained in the custody of the Bank and may be entered into the Federal
Reserve Book Entry System, or the security depository system of the Depository
Trust Corporation. The Bank's main office is at 225 Franklin Street, Boston,
Massachusetts 02110.
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 80
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. Transactions placed
through dealers serving as primary market-makers reflect the spread between
the bid and asked prices. Securities may also be purchased from underwriters
at prices which include underwriting fees.
With respect to equity and fixed income securities, T. Rowe Price may
effect principal transactions on behalf of the Fund with a broker or dealer
who furnishes brokerage and/or research services, designate any such broker or
dealer to receive selling concessions, discounts or other allowances, or
otherwise deal with any such broker or dealer in connection with the
acquisition of securities in underwritings.
How Evaluations are Made of the Overall Reasonableness of Brokerage
Commissions Paid
On a continuing basis, T. Rowe Price seeks to determine what levels of
commission rates are reasonable in the marketplace for transactions executed
on behalf of the Fund. In evaluating the reasonableness of commission rates,
T. Rowe Price considers: (a) historical commission rates, both before and
since rates have been fully negotiable; (b) rates which other institutional
investors are paying, based on available public information; (c) rates quoted
by brokers and dealers; (d) the size of a particular transaction, in terms of
the number of shares, dollar amount, and number of clients involved; (e) the
complexity of a particular transaction in terms of both execution and
settlement; (f) the level and type of business done with a particular firm
over a period of time; and (g) the extent to which the broker or dealer has
capital at risk in the transaction.
Description of Research Services Received from Brokers and Dealers
T. Rowe Price receives a wide range of research services from brokers
and dealers. These services include information on the economy, industries,
groups of securities, individual companies, statistical information,
accounting and tax law interpretations, political developments, legal
developments affecting portfolio securities, technical market action, pricing
and appraisal services, credit analysis, risk measurement analysis,
performance analysis and analysis of corporate responsibility issues. These
services provide both domestic and international perspective. Research
services are received primarily in the form of written reports, computer
generated services, telephone contacts and personal meetings with security
analysts. In addition, such services may be provided in the form of meetings
arranged with corporate and industry spokespersons, economists, academicians
and government representatives. In some cases, research services are
generated by third parties but are provided to T. Rowe Price by or through
broker-dealers.
PAGE 81
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 who provide quality execution services also furnish
research services to T. Rowe Price. In order to be assured of continuing to
receive research services considered of value to its clients, T. Rowe Price
has adopted a brokerage allocation policy embodying the concepts of Section
28(e) of the Securities Exchange Act of 1934, which permits an investment
adviser to cause an account to pay commission rates in excess of those another
broker or dealer would have charged for effecting the same transaction, if the
adviser determines in good faith that the commission paid is reasonable in
relation to the value of the brokerage and research services provided. The
determination may be viewed in terms of either the particular transaction
involved or the overall responsibilities of the adviser with respect to the
accounts over which it exercises investment discretion. Accordingly, while T.
Rowe Price cannot readily determine the extent to which commission rates or
net prices charged by broker-dealers reflect the value of their research
services, T. Rowe Price would expect to assess the reasonableness of
commissions in light of the total brokerage and research services provided by
each particular broker.
Internal Allocation Procedures
T. Rowe Price has a policy of not precommitting a specific amount of
business to any broker or dealer over any specific time period. Historically,
the majority of brokerage placement has been determined by the needs of a
specific transaction such as market-making, availability of a buyer or seller
of a particular security, or specialized execution skills. However, T. Rowe
Price does have an internal brokerage allocation procedure for that portion of
its discretionary client brokerage business where special needs do not exist,
or where the business may be allocated among several brokers which are able to
meet the needs of the transaction.
PAGE 82
Each year, T. Rowe Price assesses the contribution of the brokerage and
research services provided by brokers, and attempts to allocate a portion of
its brokerage business in response to these assessments. Research analysts,
counselors, various investment committees, and the Trading Department each
seek to evaluate the brokerage and research services they receive from brokers
and make judgments as to the level of business which would recognize such
services. In addition, brokers sometimes suggest a level of business they
would like to receive in return for the various brokerage and research
services they provide. Actual brokerage received by any firm may be less than
the suggested allocations but can, and often does, exceed the suggestions,
because the total brokerage business is allocated on the basis of all the
considerations described above. In no case is a broker excluded from
receiving business from T. Rowe Price because it has not been identified as
providing research services.
Miscellaneous
T. Rowe Price's brokerage allocation policy is consistently applied to
all its fully discretionary accounts, which represent a substantial majority
of all assets under management. Research services furnished by brokers
through which T. Rowe Price effects securities transactions may be used in
servicing all accounts (including non-Fund accounts) managed by T. Rowe Price.
Conversely, research services received from brokers which execute transactions
for the Fund are not necessarily used by T. Rowe Price exclusively in
connection with the management of the Fund.
From time to time, orders for clients may be placed through a
computerized transaction network.
The Fund does not allocate business to any broker-dealer on the basis of
its sales of the Fund's shares. However, this does not mean that broker-
dealers who purchase Fund shares for their clients will not receive business
from the Fund.
Some of T. Rowe Price's other clients have investment objectives and
programs similar to those of the Fund. T. Rowe Price may occasionally make
recommendations to other clients which result in their purchasing or selling
securities simultaneously with the Fund. As a result, the demand for
securities being purchased or the supply of securities being sold may
increase, and this could have an adverse effect on the price of those
securities. It is T. Rowe Price's policy not to favor one client over another
in making recommendations or in placing orders. T. Rowe Price frequently
follows the practice of grouping orders of various clients for execution which
generally results in lower commission rates being attained. In certain cases,
where the aggregate order is executed in a series of transactions at various
prices on a given day, each participating client's proportionate share of such
order reflects the average price paid or received with respect to the total
order. T. Rowe Price has established a general investment policy that it will
ordinarily not make additional purchases of a common stock of a company for
its clients (including the T. Rowe Price Funds) if, as a result of such
purchases, 10% or more of the outstanding common stock of such company would
be held by its clients in the aggregate.
To the extent possible, T. Rowe Price intends to recapture solicitation
fees paid in connection with tender offers through T. Rowe Price Investment
PAGE 83
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.
PRICING OF SECURITIES
Equity securities listed or regularly traded on a securities exchange
(including NASDAQ) are valued at the last quoted sales price on the day the
valuations are made. A security which is listed or traded on more than one
exchange is valued at the quotation on the exchange determined to be the
primary market for such security. Other equity securities and those listed
securities that are not traded on a particular day are valued at a price
within the limits of the latest bid and asked prices deemed by the Board of
Directors, or by persons delegated by the Board, best to reflect 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
PAGE 84
any succeeding governmental authority) shall govern as to whether the
conditions prescribed in (b), (c) or (d) exist.
DIVIDENDS
Unless you elect otherwise, dividends and capital gain distributions
will be invested on the reinvestment date using the NAV per share of that
date. The reinvestment date normally precedes the payment date by about 10
days although the exact timing is subject to change.
TAX STATUS
The Fund intends to qualify as a "regulated investment company" under
Subchapter M of the Internal Revenue Code of 1986, as amended ("Code").
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. It does not
make any difference whether dividends and capital gain distributions are paid
in cash or in additional shares.
At the time of your purchase, the Fund's net asset value may reflect
undistributed income, capital gains or net unrealized appreciation of
securities held by the Fund which may be a subsequently distributed to you as
either dividends or capital gain distributions. For federal income tax
purposes, the Fund is permitted to carry forward its net realized capital
losses, if any, for eight years, and realize net capital gains up to the
amount of such losses without being required to pay taxes on, or distribute
such gains.
If, in any taxable year, the Fund should not qualify as a regulated
investment company under the Code: (i) the Fund would be taxed at normal
corporate rates on the entire amount of its taxable income without deduction
for dividends or other distributions to shareholders and (ii) the Fund's
distributions to the extent made out of the Fund's current or accumulated
earnings and profits would be taxable to shareholders as ordinary dividends
(regardless of whether they would otherwise have been considered capital gain
dividends).
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. Capital gains on the
sale of such holdings will be deemed to be ordinary income regardless of how
long the Fund holds its investment. In addition to bearing their
proportionate share of the funds expenses (management fees and operating
expenses) shareholders will also indirectly bear similar expenses of such
funds. In addition, the Fund may be subject to corporate income tax and an
interest charge on certain dividends and capital gains earned from these
PAGE 85
investments, regardless of whether such income and gains were distributed to
shareholders.
In accordance with tax regulations, the Fund intends to treat these
securities as sold on the last day of the Fund's fiscal year and recognize any
gains for tax purposes at that time; losses will not be recognized. Such
gains will be considered ordinary income which the Fund will be required to
distribute even though it has not sold the security and received cash to pay
such distributions.
Foreign Currency Gains and Losses
Foreign currency gains and losses, including the portion of gain or loss
on the sale of debt securities attributable to foreign exchange rate
fluctuations, are 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
PAGE 86
combined with another class or classes, by action approved by the vote of the
holders of a majority of all the shares of all classes entitled to be voted on
the proposal, without any additional right to vote as a class by the holders
of the capital stock or of another affected class or classes.
Each insurance company, as the Shareholder, is entitled to one vote for
each full share held (and fractional votes for fractional shares held) and
will vote in the election of or removal of directors (to the extent
hereinafter provided) and on other matters submitted to the vote of the
Shareholder. However, the insurance company may pass through voting rights to
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. Under state
insurance law, there are certain circumstances under which the insurance
companies may disregard such voting instructions. If voting instructions are
ever so ignored, Contract Holders or Participants will be advised of that
action in the next semi-annual report.
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.
PAGE 87
INDEPENDENT ACCOUNTANTS
_______________________, ________________________, are independent
accountants to the Fund. The Statement of Assets and Liabilities of the Fund
as of March __, 1994, included in the Statement of Additional Information, has
been included in reliance on the report of _____________, given on the
authority of said firm as experts in auditing and accounting.
PAGE 88
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements. A Statement of Assets and Liabilities of
Registrant as of March ___, 1994, appears in the Statement of
Additional Information. Such Statement has been examined by
_____________________, independent accountants, and has been
included in the Statement of Additional Information in reliance on
the report of such accountants appearing in the Statement of
Additional Information given upon their authority as experts in
auditing and account.+ All other financial statements, schedules
and historical information have been omitted as the subject matter
is not required, not present, or not present in amounts sufficient
to require submission.
(b) Exhibits.
(1) Articles of Incorporation of Registrant, dated January 31,
1994
(2) By-Laws of Registrant
(3) Inapplicable
(4) See Article SIXTH, Capital Stock, Paragraphs (b)-(g) of the
Articles of Incorporation, Article II, Shareholders,
Sections 2.01-2.11 and Article VIII, Capital Stock, Sections
8.01-8.07 of the Bylaws filed as Exhibits to this
Registration Statement.
(5)(a) Investment Management Agreement between Registrant, on
behalf of T. Rowe Price Equity Income Portfolio, and T. Rowe
Price Associates, Inc. (to be filed by amendment)
(5)(b) Investment Management Agreement between Registrant, on
behalf of T. Rowe Price New America Growth Portfolio, and T.
Rowe Price Associates, Inc. (to be filed by amendment)
(6) Underwriting Agreement between Registrant, on behalf of T.
Rowe Price Equity Income Portfolio and T. Rowe Price New
America Growth Portfolio, and T. Rowe Price Investment
Services, Inc. (to be filed by amendment)
(7) Inapplicable
+Omitted from Registration Statement as initially filed since
Registrant has no assets or liabilities and has never had any
assets or liabilities. Registrant proposes to raise its minimum
capital through an initial private offering of shares at $______
per share.
PAGE 89
(8)(a) Custodian Agreement between T. Rowe Price Funds and State
Street Bank and Trust Company, dated September 28, 1987, as
amended to June 24, 1988, October 19, 1988, February 22,
1989, July 19, 1989, September 15, 1989, December 15, 1989,
December 20, 1989, January 25, 1990, February 21, 1990, June
12, 1990, July 18, 1990, October 15, 1990, February 13,
1991, March 6, 1991, September 12, 1991, November 6, 1991,
April 23, 1992, September 2, 1992, November 3, 1992,
December 16, 1992, December 21, 1992, January 28, 1993,
April 22, 1993 and September 16, 1993 (to be filed by
amendment)
(8)(b) Subcustodian Agreement between Registrant on behalf of T.
Rowe Price Equity Series, Inc. and T. Rowe Price New America
Growth Fund, and State Street Bank and Trust Company and the
Chase Manhattan Bank, N.A. (to be filed by amendment)
(9)(a) Transfer Agency and Service Agreement between T. Rowe Price
Services, Inc. and T. Rowe Price Funds (to be filed by
amendment)
(9)(b) Agreement between T. Rowe Price Associates, Inc. and T. Rowe
Price Funds for Fund Accounting Services (to be filed by
amendment)
(9)(c) Inapplicable
(10) Opinion of Counsel, dated February 4, 1994
(11) Inapplicable
(12) Inapplicable
(13) Inapplicable
(14) Inapplicable
(15) Inapplicable
(16) Inapplicable
Item 25. Persons Controlled by or Under Common Control.
None.
Item 26. Number of Holders of Securities
As of February 1, 1994, there were zero shareholders in the T. Rowe
Price Equity Series, Inc.
Item 27. Indemnification
The Registrant maintains comprehensive Errors and Omissions and Officers and
Directors insurance policies written by the Evanston Insurance Company, The
Chubb Group and ICI Mutual. These policies provide coverage for the named
insureds, which include T. Rowe Price Associates, Inc. ("Manager"), Rowe
PAGE 90
Price-Fleming International, Inc. ("Price-Fleming"), T. Rowe Price Investment
Services, Inc., T. Rowe Price Services, Inc., T. Rowe Price Trust Company, T.
Rowe Price Stable Asset Management, Inc., RPF International Bond Fund and
thirty-four other investment companies, namely, T. Rowe Price Growth Stock
Fund, Inc., T. Rowe Price New Horizons Fund, Inc., T. Rowe Price New Era Fund,
Inc., T. Rowe Price New Income Fund, Inc., T. Rowe Price Prime Reserve Fund,
Inc., T. Rowe Price Tax-Free Income Fund, Inc., T. Rowe Price Tax-Exempt Money
Fund, Inc., T. Rowe Price International Funds, Inc., T. Rowe Price Growth &
Income Fund, Inc., T. Rowe Price Tax-Free Short-Intermediate Fund, Inc., T.
Rowe Price Short-Term Bond Fund, Inc., T. Rowe Price High Yield Fund, Inc., T.
Rowe Price Tax-Free High Yield Fund, Inc., T. Rowe Price New America Growth
Fund, T. Rowe Price Equity Income Fund, T. Rowe Price GNMA Fund, T. Rowe Price
Capital Appreciation Fund, T. Rowe Price State Tax-Free Income Trust, T. Rowe
Price California Tax-Free Income Trust, T. Rowe Price Science & Technology
Fund, Inc., T. Rowe Price Small-Cap Value Fund, Inc., Institutional
International Funds, Inc., T. Rowe Price U.S. Treasury Funds, Inc., T. Rowe
Price Index Trust, Inc., T. Rowe Price Spectrum Fund, Inc., T. Rowe Price
Balanced Fund, Inc., T. Rowe Price Adjustable Rate U.S. Government Fund, Inc.,
T. Rowe Price Mid-Cap Growth Fund, Inc., T. Rowe Price OTC Fund, Inc., T. Rowe
Price Tax-Free Insured Intermediate Bond Fund, Inc., T. Rowe Price Dividend
Growth Fund, Inc., T. Rowe Price Blue Chip Growth Fund, Inc., T. Rowe Price
Summit Funds, Inc. and T. Rowe Price Summit Municipal Funds, Inc. The
Registrant and the thirty-four investment companies listed above, with the
exception of T. Rowe Price Index Trust, Inc. and Institutional International
Funds, Inc., will be collectively referred to as the Price Funds. The
investment manager for the Price Funds, including T. Rowe Price Index Trust,
Inc., is the Manager. Price-Fleming is the manager to T. Rowe Price
International Funds, Inc. and Institutional International Funds, Inc. and is
50% owned by TRP Finance, Inc., a wholly-owned subsidiary of the Manager, 25%
owned by Copthall Overseas Limited, a wholly-owned subsidiary of Robert
Fleming Holdings Limited, and 25% owned by Jardine Fleming International
Holdings Limited. In addition to the corporate insureds, the policies also
cover the officers, directors, and employees of each of the named insureds.
The premium is allocated among the named corporate insureds in accordance with
the provisions of Rule 17d-1(d)(7) under the Investment Company Act of 1940.
General. The Charter of the Corporation provides that to the
fullest extent permitted by Maryland or federal law, no director of
officer of the Corporation shall be personally liable to the Corporation
or the holders of Shares for money damages and each director and officer
shall be indemnified by the Corporation; provided, however, that nothing
herein shall be deemed to protect any director or officer of the
Corporation against any liability to the Corporation of the holders of
Shares to which such director or officer would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his or her office.
Article X, Section 10.01 of the Registrant's By-Laws provides as follows:
Section 10.01. Indemnification and Payment of Expenses in Advance:
The Corporation shall indemnify any individual ("Indemnitee") who is a present
or former director, officer, employee, or agent of the Corporation, or who is
or has been serving at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, who, by reason of his position was, is, or is threatened to
be made a party to any threatened, pending, or completed action, suit, or
PAGE 91
proceeding, whether civil, criminal, administrative, or investigative
(hereinafter collectively referred to as a "Proceeding") against any
judgments, penalties, fines, settlements, and reasonable expenses (including
attorneys' fees) incurred by such Indemnitee in connection with any
Proceeding, to the fullest extent that such indemnification may be lawful
under Maryland law. The Corporation shall pay any reasonable expenses so
incurred by such Indemnitee in defending a Proceeding in advance of the final
disposition thereof to the fullest extent that such advance payment may be
lawful under Maryland law. Subject to any applicable limitations and
requirements set forth in the Corporation's Articles of Incorporation and in
these By-Laws, any payment of indemnification or advance of expenses shall be
made in accordance with the procedures set forth in Maryland law.
Notwithstanding the foregoing, nothing herein shall protect or purport to
protect any Indemnitee against any liability to which he would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of his office
("Disabling Conduct").
Anything in this Article X to the contrary notwithstanding, no
indemnification shall be made by the Corporation to any Indemnitee unless:
(a) there is a final decision on the merits by a court or other body
before whom the Proceeding was brought that the Indemnitee was not
liable by reason of Disabling Conduct; or
(b) in the absence of such a decision, there is a reasonable
determination, based upon a review of the facts, that the
Indemnitee was not liable by reason of Disabling Conduct, which
determination shall be made by:
(i) the vote of a majority of a quorum of directors who are
neither "interested persons" of the Corporation as defined in
Section 2(a)(19) of the Investment Company Act, nor parties to
the Proceeding; or
(ii) an independent legal counsel in a written opinion.
Anything in this Article X to the contrary notwithstanding, any advance
of expenses by the Corporation to any Indemnitee shall be made only upon the
undertaking by such Indemnitee to repay the advance unless it is ultimately
determined that such Indemnitee is entitled to indemnification as above
provided, and only if one of the following conditions is met:
(a) the Indemnitee provides a security for his undertaking; or
(b) the Corporation shall be insured against losses arising by reason
of any lawful advances; or
(c) there is a determination, based on a review of readily available
facts, that there is reason to believe that the Indemnitee will
ultimately be found entitled to indemnification, which
determination shall be made by:
PAGE 92
(i) a majority of a quorum of directors who are neither
"interested persons" of the Corporation as defined in Section
2(a)(19) of the Investment Company Act, nor parties to the
Proceeding; or
(ii) an independent legal counsel in a written opinion.
Section 10.02 of the Registrant's By-Laws provides as follows:
Section 10.02. Insurance of Officers, Directors, Employees and Agents:
To the fullest extent permitted by applicable Maryland law and by Section
17(h) of the Investment Company Act, as from time to time amended, the
Corporation may purchase and maintain insurance on behalf of any person who is
or was a director, officer, employee, or agent of the Corporation, or who is
or was serving at the request of the Corporation as a director, officer,
employee, or agent of another corporation, partnership, joint venture, trust,
or other enterprise, against any liability asserted against him and incurred
by him in or arising out of his position, whether or not the Corporation would
have the power to indemnify him against such liability.
Insofar as indemnification for liability under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
Item 28. Business and Other Connections of Investment Manager.
Rowe Price-Fleming International, Inc. ("Price-Fleming"), a Maryland
corporation, is a corporate joint venture 50% owned by TRP Finance, Inc., a
wholly-owned subsidiary of the Manager and was organized in 1979 to provide
investment counsel service with respect to foreign securities for
institutional investors in the United States. Price-Fleming, in addition to
managing private counsel client accounts, also sponsors registered investment
companies which invest in foreign securities, serves as general partner of
RPFI International Partners, Limited Partnership, and provides investment
advice with respect to its shares in the International Common Trust Fund
maintained by T. Rowe Price Trust Company.
T. Rowe Price Investment Services, Inc. ("Investment Services"), a wholly-
owned subsidiary of the Manager, is a Maryland corporation organized in 1980
for the purpose of acting as the principal underwriter and distributor for the
Price Funds. Investment Services is registered as a broker-dealer under the
Securities Exchange Act of 1934 and is a member of the National Association of
Securities Dealers, Inc. In 1984, Investment Services expanded its activities
to include a discount brokerage service.
PAGE 93
TRP Distribution, Inc., a wholly-owned subsidiary of Investment Services, is a
Maryland corporation organized in 1991. It was organized for and engages in
the sale of certain investment related products prepared by Investment
Services.
T. Rowe Price Associates Foundation, Inc., was organized in 1981 for the
purpose of making charitable contributions to religious, charitable,
scientific, literary and educational organizations.
The Foundation (which is not a subsidiary of the Manager) is funded solely by
contributions from the Manager and income from investments.
T. Rowe Price Services, Inc. ("Price Services"), a wholly-owned subsidiary of
the Manager, is a Maryland corporation organized in 1982 and is registered as
a transfer agent under the Securities Exchange Act of 1934. Price Services
provides transfer agent, dividend disbursing, and certain other services,
including shareholder services, to the Price Funds.
T. Rowe Price Retirement Plan Services, Inc. ("RPS"), a wholly-owned
subsidiary of the Manager, was incorporated in Maryland in 1991 and is
registered as a transfer agent under the Securities Exchange Act of 1934. RPS
provides administrative, recordkeeping, and subaccounting services to
administrators of employee benefit plans.
T. Rowe Price Trust Company ("Trust Company"), a wholly-owned subsidiary of
the Manager, is a Maryland chartered limited purpose trust company, organized
in 1983 for the purpose of providing fiduciary services. The Trust Company
serves as trustee/custodian for employee benefit plans, common trust funds and
a few trusts.
T. Rowe Price Threshold Fund, L.P., a Delaware limited partnership, was
organized in 1983 by the Manager, and invests in private financings of small
companies with high growth potential. T. Rowe Price Threshold Fund II, L.P.,
a similar Delaware partnership, was organized in 1986. The Manager is the
General Partner of each partnership.
RPFI International Partners, Limited Partnership, is a Delaware limited
partnership organized in 1985 for the purpose of investing in a diversified
group of small and medium-sized rapidly growing non-U.S. companies.
Price-Fleming is the general partner of this partnership, and certain clients
of Price-Fleming are its limited partners.
T. Rowe Price Real Estate Group, Inc. ("Real Estate Group"), is a Maryland
corporation and a wholly-owned subsidiary of the Manager established in 1986
to provide real estate services. Subsidiaries of Real Estate Group are: T.
Rowe Price Realty Income Fund I Management, Inc., a Maryland corporation
(General Partner of T. Rowe Price Realty Income Fund I, A No-Load Limited
Partnership), T. Rowe Price Realty Income Fund II Management, Inc., a Maryland
corporation (General Partner of T. Rowe Price Realty Income Fund II, America's
Sales-Commission-Free Real Estate Limited Partnership), T. Rowe Price Realty
Income Fund III Management, Inc., a Maryland corporation (General Partner of
T. Rowe Price Realty Income Fund III, America's Sales-Commission-Free Real
Estate Limited Partnership, a Delaware limited partnership), and T. Rowe Price
Realty Income Fund IV Management, Inc., a Maryland corporation (General
Partner of T. Rowe Price Realty Income Fund IV, America's
Sales-Commission-Free Real Estate Limited Partnership). Real Estate Group
PAGE 94
serves as investment manager to T. Rowe Price Renaissance Fund, Ltd., A
Sales-Commission-Free Real Estate Investment, established in 1989 as a
Maryland corporation which qualifies as a REIT.
T. Rowe Price Stable Asset Management, Inc. ("Stable Asset Management") is a
Maryland corporation organized in 1988 as a wholly-owned subsidiary of the
Manager. Stable Asset Management, which is registered as an investment
adviser under the Investment Advisers Act of 1940, specializes in the
management of investment portfolios which seek stable and consistent
investment returns through the use of guaranteed investment contracts, book
investment contracts, structured or synthetic investment contracts, and
short-term fixed-income securities.
T. Rowe Price Recovery Fund Associates, Inc., a Maryland corporation, is a
wholly-owned subsidiary of the Manager organized in 1988 for the purpose of
serving as the General Partner of T. Rowe Price Recovery Fund, L.P., a
Delaware limited partnership which invests in financially distressed
companies.
T. Rowe Price (Canada), Inc. is a Maryland corporation organized in 1988 as a
wholly-owned subsidiary of the Manager. This entity is registered as an
investment adviser under the Investment Advisers Act of 1940, and may apply
for registration as an investment manager under the Securities Act of Ontario
in order to be eligible to provide certain services to the RPF
International Bond Fund, a trust (whose shares are sold in Canada) which
Price-Fleming serves as investment adviser.
Since 1983, the Manager has organized several distinct Maryland limited
partnerships, which are informally called the Pratt Street Ventures
partnerships, for the purpose of acquiring interests in growth-oriented
businesses.
Tower Venture, Inc., a wholly-owned subsidiary of the Manager, is a Maryland
corporation organized in 1989 for the purpose of serving as a general partner
of 100 East Pratt St., L.P., a Maryland limited partnership whose limited
partners also include the Manager. The purpose of the partnership is to
further develop and improve the property at 100 East Pratt Street, the site of
the Manager's headquarters, through the construction of additional office,
retail and parking space.
T. Rowe Price Frontier Limited ("Frontier") is a Bermuda corporation organized
in 1989 as an investment vehicle for foreign investors who wish to invest in
small U.S. public companies with high growth potential. Frontier is the
limited partner of T. Rowe Price New Frontier Fund II (Netherlands Antilles),
C.V., a limited partnership whose general partners are T. Rowe Price New
Frontier Management Associates (Netherlands Antilles) N.V. ("Management
Associates") and T. Rowe Price New Frontier Investment Associates (Netherlands
Antilles), C.V. ("Investment Associates"). Management Associates is a
corporation which is a wholly-owned subsidiary of the Manager. Investment
Associates is a limited partnership whose general partners are Management
Associates and T. Rowe Price Associates Frontiers, Inc., a Maryland
corporation which is a wholly-owned subsidiary of the Manager.
TRP Suburban, Inc. is a Maryland corporation organized in 1990 as a
wholly-owned subsidiary of the Manager. TRP Suburban has entered into
agreements with McDonogh School and CMANE-McDonogh-Rowe Limited Partnership to
PAGE 95
construct an office building in Owings Mills, Maryland, which houses the
Manager's transfer agent, plan administrative services, retirement plan
services and operations support functions.
TRP Finance, Inc. and TRP Finance MRT, Inc., wholly-owned subsidiaries of the
Manager, are Delaware corporations organized in 1990 to manage certain passive
corporate investments and other intangible assets.
T. Rowe Price Strategic Partners Fund, L.P. is a Delaware limited partnership
organized in 1990 for the purpose of investing in small public and private
companies seeking capital for expansion or undergoing a restructuring of
ownership. The general partner of the Fund is T. Rowe Price Strategic
Partners, L.P., a Delaware limited partnership whose general partner is T.
Rowe Price Strategic Partners Associates, Inc., ("Strategic Associates"), a
Maryland corporation which is a wholly-owned subsidiary of the Manager.
Strategic Associates also serves as the general partner of T. Rowe Price
Strategic Partners II, L.P., a Delaware limited partnership established in
1992, which in turn serves as general partner of T. Rowe price Strategic
Partners Fund II, L.P., a Delaware limited partnership organized in 1992.
Listed below are the directors of the Manager who have other substantial
businesses, professions, vocations, or employment aside from that of Director
of the Manager:
JAMES E. HALBKAT, JR., Director of the Manager. Mr. Halbkat is President of
U.S. Monitor Corporation, a provider of public response systems. Mr. Halbkat's
address is: P.O. Box 23109, Hilton Head Island, South Carolina 29925.
JOHN W. ROSENBLUM, Director of the Manager. Mr. Rosenblum is the Tayloe
Murphy Professor at the University of Virginia, and a director of: Chesapeake
Corporation, a manufacturer of paper products, Cadmus Communications Corp., a
provider of printing and communication services; Comdial Corporation, a
manufacturer of telephone systems for businesses; and Cone Mills Corporation,
a textiles producer. Mr. Rosenblum's address is: P.O. Box 6550,
Charlottesville, Virginia 22906.
ROBERT L. STRICKLAND, Director of the Manager. Mr. Strickland is Chairman of
Lowe's Companies, Inc., a retailer of specialty home supplies. Mr.
Strickland's address is 604 Two Piedmont Plaza Building, Winston-Salem, North
Carolina 27104.
PHILIP C. WALSH, Director of the Manager. Mr. Walsh is a Consultant to Cyprus
Amax Minerals Company, Englewood, Colorado, and a director of Piedmont Mining
Company, Inc., Charlotte, North Carolina. Mr. Walsh's address is: Blue Mill
Road, Morristown, New Jersey 07960.
With the exception of Messrs. Halbkat, Rosenblum, Strickland, and Walsh, all
of the directors of the Manager are employees of the Manager.
George J. Collins, who is Chief Executive Officer, President, and a Managing
Director of the Manager, is a Director of Price-Fleming.
George A. Roche, who is Chief Financial Officer and a Managing Director of the
Manager, is a Vice President and a Director of Price-Fleming.
PAGE 96
M. David Testa, who is a Managing Director of the Manager, is Chairman of the
Board of Price-Fleming.
Charles H. Salisbury, Jr., who is a Managing Director of the Manager, is a
Vice President and a Director of Price-Fleming.
Henry H. Hopkins, Charles P. Smith, and Peter Van Dyke, who are Managing
Directors of the Manager, are Vice Presidents of Price-Fleming.
Robert P. Campbell, Robert C. Howe, Veena A. Kutler, George A. Murnaghan,
William F. Wendler, II, and Edward A. Wiese, who are Vice Presidents of the
Manager, are Vice Presidents of Price-Fleming.
Alvin M. Younger, Jr., who is a Managing Director and the Secretary and
Treasurer of the Manager, is Secretary and Treasurer of Price-Fleming.
Joseph P. Croteau, who is a Vice President of the Manager, is Controller of
Price-Fleming.
Nolan L. North, who is a Vice President of the Manager, is Assistant Treasurer
of Price-Fleming.
Leah P. Holmes, who is an Assistant Vice President of the Manager, is a Vice
President of Price-Fleming.
Barbara A. Van Horn, who is Assistant Secretary of the Manager, is Assistant
Secretary of Price-Fleming.
Certain directors and officers of the Manager are also officers and/or
directors of one or more of the Price Funds and/or one or more of the
affiliated entities listed herein.
See also "Management of Fund," in Registrant's Statement of Additional
Information.
Item 29. Principal Underwriters.
(a) The principal underwriter for the Registrant is Investment
Services. Investment Services acts as the principal underwriter for the
other thirty-four Price Funds. Investment Services is a wholly-owned
subsidiary of the Manager 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. Investment Services has been
formed for the limited purpose of distributing the shares of the Price
Funds and will not engage in the general securities business. Since the
Price Funds are sold on a no-load basis, Investment Services will not
receive any commission or other compensation for acting as principal
underwriter.
(b) The address of each of the directors and officers of Investment
Services listed below is 100 East Pratt Street, Baltimore, Maryland
21202.
PAGE 97
Name and Principal Positions and Offices Offices
Business Address With Underwriter With Registrant
__________________ _____________________ _______________
James Sellers Riepe President and Director Vice President and
Trustee
Henry Holt Hopkins Vice President and Vice President
Director
Mark E. Rayford Director None
Charles E. Vieth Vice President and None
Director
Patricia M. Archer Vice President None
Edward C. Bernard Vice President None
Joseph C. Bonasorte Vice President None
Meredith C. Callanan Vice President None
Victoria C. Collins Vice President None
Christopher W. Dyer Vice President None
Mark S. Finn Vice President and None
Assistant Controller
Forrest R. Foss Vice President None
Patricia O. Goodyear Vice President None
James W. Graves Vice President None
Andrea G. Griffin Vice President None
Thomas Grizzard Vice President None
David J. Healy Vice President None
Joseph P. Healy Vice President None
Walter J. Helmlinger Vice President None
Eric G. Knauss Vice President None
Douglas G. Kremer Vice President None
Sharon Renae Krieger Vice President None
Keith Wayne Lewis Vice President None
David A. Lyons Vice President None
Sarah McCafferty Vice President None
Maurice A. Minerbi Vice President None
George A. Murnaghan Vice President None
Steven E. Norwitz Vice President None
Kathleen M. O'Brien Vice President None
Charles S. Peterson Vice President None
Pamela D. Preston Vice President None
Lucy B. Robins Vice President None
John R. Rockwell Vice President None
William F. Wendler, II Vice President None
Jane F. White Vice President None
Thomas R. Woolley Vice President None
Alvin M. Younger, Jr. Secretary and Treasurer None
Joseph P. Croteau Controller None
Catherine L. Berkenkemper Assistant Vice President None
S. Brooks Biggs Assistant Vice President None
Patricia S. Butcher Assistant Vice President None
Laura H. Chasney Assistant Vice President None
George H. Finney Assistant Vice President None
John A. Galateria Assistant Vice President None
Cheryl A. Gustitus Assistant Vice President None
Keith J. Langrehr Assistant Vice President None
C. Lillian Matthews Assistant Vice President None
Tom J. Mauer Assistant Vice President None
PAGE 98
Janice D. McCrory Assistant Vice President None
Sandra J. McHenry Assistant Vice President None
JeanneMarie B. Patella Assistant Vice President None
Arthur J. Siber Assistant Vice President None
Mary A. Tamberrino Assistant Vice President None
Monica R. Tucker Assistant Vice President None
Linda C. Wright Assistant Vice President None
Nolan L. North Assistant Treasurer None
Barbara A. VanHorn Assistant Secretary None
(c) Not applicable. Investment Services will not receive any
compensation with respect to its activities as underwriter for the Price
Funds since the Price Funds are sold on a no-load basis.
Item 30. Location of Accounts and Records.
All accounts, books, and other documents required to be maintained by T.
Rowe Price Equity Series, Inc. under Section 31(a) of the Investment
Company Act of 1940 and the rules thereunder will be maintained by T.
Rowe Price Equity Series, Inc., at its offices at 100 East Pratt Street,
Baltimore, Maryland 21202. Transfer agent, dividend disbursing, and
shareholder service activities are performed by T. Rowe Price Services,
Inc., at 100 East Pratt Street, Baltimore, Maryland 21202. Custodian
activities for T. Rowe Price Equity Series, Inc. are performed at State
Street Bank and Trust Company's Service Center (State Street South), 1776
Heritage Drive, Quincy, Massachusetts 02171.
Item 31. Management Services.
The Registrant is not a party to any management-related service contract,
other than as set forth in the Prospectus.
Item 32. Undertakings.
(a) The undersigned Registrant hereby undertakes to file an amendment
to the Registration Statement with certified financial statements
showing the initial capital received before accepting subscriptions
from any persons in excess of 25 if it raises its initial capital
pursuant to Section 14(a)(3) of the 1940 Act.
(b) The Fund will file, within four to six months from the effective
date of its registration statement, a post-effective amendment
using financial statements which need not be certified.
(c) If requested to do so by the holders of at least 10% of all votes
entitled to be cast, the Registrant will call a meeting of
shareholders for the purpose of voting on the question of removal
of a director or directors and will assist in communications with
other shareholders to the extent required by Section 16(c).
(d) Each series of the Registrant agrees to furnish, upon request and
without charge, a copy of its latest Annual Report to each person
to whom as prospectus is delivered.
PAGE 99
Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Baltimore, State of
Maryland, this 4th day of February, 1994.
T. ROWE PRICE EQUITY SERIES, INC.
/s/James S. Riepe
By: James S. Riepe, President and Director
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated:
SIGNATURE TITLE DATE
________ _____ _____
/s/James S. Riepe President and Director
James S. Riepe (Principal Executive Officer) February 4, 1994
/s/Carmen F. Deyesu Treasurer
Carmen F. Deyesu (Principal Financial Officer) February 4, 1994
PAGE 1
T. ROWE PRICE EQUITY SERIES, INC.
ARTICLES OF INCORPORATION
FIRST: THE UNDERSIGNED, Henry H. Hopkins, whose address is 100 East
Pratt Street, Baltimore, Maryland 21202, being at least eighteen years of age,
acting as incorporator, does hereby form a corporation under the General Laws
of the State of Maryland.
SECOND: (a) The name of the corporation (which is hereinafter called
the "Corporation") is:
T. Rowe Price Equity Series, Inc.
(b) The Corporation acknowledges that it is adopting its corporate name
through permission of T. Rowe Price Associates, Inc., a Maryland corporation
(hereinafter referred to as "Price Associates"), and acknowledges that Price
Associates has the sole and exclusive right to use or license the use of the
name "T. Rowe Price" in commerce. The Corporation agrees that if at any time
and for any cause, the investment adviser or distributor of the Corporation
ceases to be Price Associates or an affiliate of Price Associates, the
Corporation shall at the written request of Price Associates take all
requisite action to amend its charter to eliminate the name "T. Rowe Price"
from the Corporation's corporate name and from the designations of its shares
of capital stock. The Corporation further acknowledges that Price Associates
reserves the right to grant the non-exclusive right to use the name "T. Rowe
Price" to any other corporation, including other investment companies, whether
now in existence or hereafter created.
THIRD: (a) The purposes for which the Corporation is formed and the
business and objects to be carried on and promoted by it are:
(1) To engage generally in the business of investing,
reinvesting, owning, holding or trading in securities, as defined in the
Investment Company Act of 1940, as from time to time amended
(hereinafter referred to as the "Investment Company Act"), as an
investment company classified under the Investment Company Act as a
management company.
(2) To engage in any one or more businesses or transactions, or
to acquire all or any portion of any entity engaged in any one or more
businesses or transactions, which the Board of Directors may from time
to time authorize or approve, whether or not related to the business
described elsewhere in this Article or to any other business at the time
or theretofore engaged in by the Corporation.
(b) The foregoing enumerated purposes and objects shall be in no way
limited or restricted by reference to, or inference from, the terms of any
other clause of this or any other Article of the charter of the Corporation,
and each shall be regarded as independent; and they are intended to be and
PAGE 2
shall be construed as powers as well as purposes and objects of the
Corporation and shall be in addition to and not in limitation of the general
powers of corporations under the General Laws of the State of Maryland.
FOURTH: The present address of the principal office of the Corporation
in this State is:
100 East Pratt Street
Baltimore, Maryland 21202
FIFTH: The name and address of the resident agent of the Corporation in
this State are:
Henry H. Hopkins
100 East Pratt Street
Baltimore, Maryland 21202
Said resident agent is a citizen of the State of Maryland, and actually
resides therein.
SIXTH: (a) The total number of shares of stock of all classes and
series which the Corporation initially has authority to issue is One Billion
(1,000,000,000) shares of capital stock (par value $.0001 per share),
amounting in aggregate par value to One Hundred Thousand Dollars ($100,000).
All of such shares are initially classified as "Common Stock" of the "T. Rowe
Price Equity Income Portfolio, and T. Rowe Price New America Growth Portfolio"
series. Each such series shall consist, until further changed, of the lesser
of (x) 1,000,000,000 shares or (y) the number of shares that could be issued
by issuing all of the shares of any series currently or hereafter classified
less the total number of shares then issued and outstanding in all of such
series. The Board of Directors may classify and reclassify any unissued
shares of capital stock (whether or not such shares have been previously
classified or reclassified) by setting or changing in any one or more respects
the preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications, or terms or conditions of
redemption of such shares of stock.
(b) The following is a description of the preferences, conversion and
other rights, voting powers, restrictions, limitations as to dividends,
qualifications, and terms and conditions of redemption of the shares of Common
Stock classified as the "T. Rowe Price Equity Income Portfolio, and T. Rowe
Price New America Growth Portfolio" series and any additional series of Common
Stock of the Corporation (unless provided otherwise by the Board of Directors
with respect to any such additional series at the time it is established and
designated):
(1) Assets Belonging to Series. All consideration received by
the Corporation from the issue or sale of shares of a particular series,
together with all assets in which such consideration is invested or
reinvested, all income, earnings, profits and proceeds thereof,
including any proceeds derived from the sale, exchange or liquidation of
such assets, and any funds or payments derived from any investment or
reinvestment of such proceeds in whatever form the same may be, shall
irrevocably belong to that series for all purposes, subject only to the
rights of creditors, and shall be so recorded upon the books of account
of the Corporation. Such consideration, assets, income, earnings,
PAGE 3
profits and proceeds, together with any General Items allocated to that
series as provided in the following sentence, are herein referred to
collectively as "assets belonging to" that series. In the event that
there are any assets, income, earnings, profits or proceeds which are
not readily identifiable as belonging to any particular series
(collectively, "General Items"), such General Items shall be allocated
by or under the supervision of the Board of Directors to and among any
one or more of the series established and designated from time to time
in such manner and on such basis as the Board of Directors, in its sole
discretion, deems fair and equitable; and any General Items so allocated
to a particular series shall belong to that series. Each such
allocation by the Board of Directors shall be conclusive and binding for
all purposes.
(2) Liabilities of Series. The assets belonging to each
particular series shall be charged with the liabilities of the
Corporation in respect of that series and all expenses, costs, charges
and reserves attributable to that series, and any general liabilities,
expenses, costs, charges or reserves of the Corporation which are not
readily identifiable as pertaining to any particular series, shall be
allocated and charged by or under the supervision of the Board of
Directors to and among any one or more of the series established and
designated from time to time in such manner and on such basis as the
Board of Directors, in its sole discretion, deems fair and equitable.
The liabilities, expenses, costs, charges and reserves allocated and so
charged to a series are herein referred to collectively as "liabilities
of" that series. Each allocation of liabilities, expenses, costs,
charges and reserves by or under the supervision of the Board of
Directors shall be conclusive and binding for all purposes.
(3) Dividends and Distributions. Dividends and capital gains
distributions on shares of a particular series may be paid with such
frequency, in such form and in such amount as the Board of Directors may
determine by resolution adopted from time to time, or pursuant to a
standing resolution or resolutions adopted only once or with such
frequency as the Board of Directors may determine, after providing for
actual and accrued liabilities of that series. All dividends on shares
of a particular series shall be paid only out of the income belonging to
that series and all capital gains distributions on shares of a
particular series shall be paid only out of the capital gains belonging
to that series. All dividends and distributions on shares of a
particular series shall be distributed pro rata to the holders of that
series in proportion to the number of shares of that series held by such
holders at the date and time of record established for the payment of
such dividends or distributions, except that in connection with any
dividend or distribution program or procedure, the Board of Directors
may determine that no dividend or distribution shall be payable on
shares as to which the shareholder's purchase order and/or payment have
not been received by the time or times established by the Board of
Directors under such program or procedure.
Dividends and distributions may be paid in cash, property or
additional shares of the same or another series, or a combination
thereof, as determined by the Board of Directors or pursuant to any
program that the Board of Directors may have in effect at the time for
the election by shareholders of the form in which dividends or
PAGE 4
distributions are to be paid. Any such dividend or distribution paid in
shares shall be paid at the current net asset value thereof.
(4) Voting. On each matter submitted to a vote of the
shareholders, each holder of shares shall be entitled to one vote for
each share standing in his name on the books of the Corporation,
irrespective of the series thereof, and all shares of all series shall
vote as a single class ("Single Class Voting"); provided, however, that
(i) as to any matter with respect to which a separate vote of any series
is required by the Investment Company Act or by the Maryland General
Corporation Law, such requirement as to a separate vote by that series
shall apply in lieu of Single Class Voting; (ii) in the event that the
separate vote requirement referred to in (i) above applies with respect
to one or more series, then, subject to (iii) below, the shares of all
other series shall vote as a single class; and (iii) as to any matter
which does not affect the interest of a particular series, including
liquidation of another series as described in subsection (7) below, only
the holders of shares of the one or more affected series shall be
entitled to vote.
(5) Redemption by Shareholders. Each holder of shares of a
particular series shall have the right at such times as may be permitted
by the Corporation to require the Corporation to redeem all or any part
of his shares of that series, at a redemption price per share equal to
the net asset value per share of that series next determined after the
shares are properly tendered for redemption, less such redemption fee or
sales charge, if any, as may be established by the Board of Directors in
its sole discretion. Payment of the redemption price shall be in cash;
provided, however, that if the Board of Directors determines, which
determination shall be conclusive, that conditions exist which make
payment wholly in cash unwise or undesirable, the Corporation may, to
the extent and in the manner permitted by the Investment Company Act,
make payment wholly or partly in securities or other assets belonging to
the series of which the shares being redeemed are a part, at the value
of such securities or assets used in such determination of net asset
value.
Notwithstanding the foregoing, the Corporation may postpone payment
of the redemption price and may suspend the right of the holders of
shares of any series to require the Corporation to redeem shares of that
series during any period or at any time when and to the extent
permissible under the Investment Company Act.
(6) Redemption by Corporation. The Board of Directors may cause
the Corporation to redeem at net asset value the shares of any series
from a holder (i) if the Board of Directors of the Corporation
determines in its sole discretion that failure to so redeem such shares
may have materially adverse consequences to the holders of shares of the
Corporation or any series, or (ii) upon such other conditions with
respect to the maintenance of shareholder accounts of a minimum amount
as may from time to time be established by the Board of Directors in its
sole discretion.
(7) Liquidation. In the event of the liquidation of a
particular series, the shareholders of the series that is being
liquidated shall be entitled to receive, as a class, when and as
PAGE 5
declared by the Board of Directors, the excess of the assets belonging
to that series over the liabilities of that series. The holders of
shares of any particular series shall not be entitled thereby to any
distribution upon liquidation of any other series. The assets so
distributable to the shareholders of any particular series shall be
distributed among such shareholders in proportion to the number of
shares of that series held by them and recorded on the books of the
Corporation. The liquidation of any particular series in which there
are shares then outstanding may be authorized by vote of a majority of
the Board of Directors then in office, subject to the approval of a
majority of the outstanding voting securities of that series, as defined
in the Investment Company Act, and without the vote of the holders of
shares of any other series. The liquidation of a particular series may
be accomplished, in whole or in part, by the transfer of assets of such
series to another series or by the exchange of shares of such series for
the shares of another series.
(8) Net Asset Value Per Share. The net asset value per share of
any series shall be the quotient obtained by dividing the value of the
net assets of that series (being the value of the assets belonging to
that series less the liabilities of that series) by the total number of
shares of that series outstanding, all as determined by or under the
direction of the Board of Directors in accordance with generally
accepted accounting principles and the Investment Company Act. Subject
to the applicable provisions of the Investment Company Act, the Board of
Directors, in its sole discretion, may prescribe and shall set forth in
the By-Laws of the Corporation or in a duly adopted resolution of the
Board of Directors such bases and times for determining the value of the
assets belonging to, and the net asset value per share of outstanding
shares of, each series, or the net income attributable to such shares,
as the Board of Directors deems necessary or desirable. The Board of
Directors shall have full discretion, to the extent not inconsistent
with the Maryland General Corporation Law and the Investment Company
Act, to determine which items shall be treated as income and which items
as capital and whether any item of expense shall be charged to income or
capital. Each such determination and allocation shall be conclusive and
binding for all purposes.
The Board of Directors may determine to maintain the net asset
value per share of any series at a designated constant dollar amount and
in connection therewith may adopt procedures not inconsistent with the
Investment Company Act for the continuing declaration of income
attributable to that series as dividends and for the handling of any
losses attributable to that series. Such procedures may provide that in
the event of any loss, each shareholder shall be deemed to have
contributed to the capital of the Corporation attributable to that
series his pro rata portion of the total number of shares required to be
canceled in order to permit the net asset value per share of that series
to be maintained, after reflecting such loss, at the designated constant
dollar amount. Each shareholder of the Corporation shall be deemed to
have agreed, by his investment in any series with respect to which the
Board of Directors shall have adopted any such procedure, to make the
contribution referred to in the preceding sentence in the event of any
such loss.
PAGE 6
(9) Equality. All shares of each particular series shall
represent an equal proportionate interest in the assets belonging to
that series (subject to the liabilities of that series), and each share
of any particular series shall be equal to each other share of that
series. The Board of Directors may from time to time divide or combine
the shares of any particular series into a greater or lesser number of
shares of that series without thereby changing the proportionate
interest in the assets belonging to that series or in any way affecting
the rights of holders of shares of any other series.
(10) Conversion or Exchange Rights. Subject to compliance with
the requirements of the Investment Company Act, the Board of Directors
shall have the authority to provide that holders of shares of any series
shall have the right to convert or exchange said shares into shares of
one or more other classes or series of shares in accordance with such
requirements and procedures as may be established by the Board of
Directors.
(c) The shares of Common Stock of the Corporation, or of any series of
Common Stock of the Corporation to the extent such Common Stock is divided
into series, may be further subdivided into classes (which may, for
convenience of reference be referred to a term other than "class"). Unless
otherwise provided in the Articles Supplementary establishing such classes,
all such shares, or all shares of a series of Common Stock in a series, shall
have identical voting, dividend, and liquidation rights. Shares of the
classes shall also be subject to such front-end sales loads, contingent
deferred sales charges, expenses (including, without limitation, distribution
expenses under a Rule 12b-1 plan and administrative expenses under an
administration or service agreement, plan or other arrangement, however
designated), conversion rights, and class voting rights as shall be consistent
with Maryland law, the Investment Company Act of 1940, and the rules and
regulations of the National Association of Securities Dealers and shall be
contained in Articles Supplementary establishing such classes.
(d) For the purposes hereof and of any articles supplementary to the
charter providing for the classification or reclassification of any shares of
capital stock or of any other charter document of the Corporation (unless
otherwise provided in any such articles or document), any class or series of
stock of the Corporation shall be deemed to rank:
(1) prior to another class or series either as to dividends or
upon liquidation, if the holders of such class or series shall be
entitled to the receipt of dividends or of amounts distributable on
liquidation, dissolution or winding up, as the case may be, in
preference or priority to holders of such other class or series;
(2) on a parity with another class or series either as to
dividends or upon liquidation, whether or not the dividend rates,
dividend payment dates or redemption or liquidation price per share
thereof be different from those of such others, if the holders of such
class or series of stock shall be entitled to receipt of dividends or
amounts distributable upon liquidation, dissolution or winding up, as
the case may be, in proportion to their respective dividend rates or
redemption or liquidation prices, without preference or priority over
the holders of such other class or series; and
PAGE 7
(3) junior to another class or series either as to dividends or
upon liquidation, if the rights of the holders of such class or series
shall be subject or subordinate to the rights of the holders of such
other class or series in respect of the receipt of dividends or the
amounts distributable upon liquidation, dissolution or winding up, as
the case may be.
(e) Unless otherwise prohibited by law, so long as the Corporation is
registered as an open-end management investment company under the Investment
Company Act, the Board of Directors shall have the power and authority,
without the approval of the holders of any outstanding shares, to increase or
decrease the number of shares of capital stock or the number of shares of
capital stock of any class or series that the Corporation has authority to
issue.
(f) The Corporation may issue and sell fractions of shares of capital
stock having pro rata all the rights of full shares, including, without
limitation, the right to vote and to receive dividends, and wherever the words
"share" or "shares" are used in the charter or By-Laws of the Corporation,
they shall be deemed to include fractions of shares, where the context does
not clearly indicate that only full shares are intended.
(g) The Corporation shall not be obligated to issue certificates
representing shares of any class or series of capital stock. At the time of
issue or transfer of shares without certificates, the Corporation shall
provide the shareholder with such information as may be required under the
Maryland General Corporation Law.
SEVENTH: The number of directors of the Corporation shall initially be
one (1), which number may be increased or decreased pursuant to the By-Laws of
the Corporation, but shall never be less than the minimum number permitted by
the General Laws of the State of Maryland now or hereafter in force. James S.
Riepe shall serve as director until the first annual meeting and until his
successor is elected and qualified.
EIGHTH: (a) The following provisions are hereby adopted for the
purpose of defining, limiting, and regulating the powers of the Corporation
and of the directors and shareholders:
(1) The Board of Directors is hereby empowered to authorize the
issuance from time to time of shares of its stock of any class or
series, whether now or hereafter authorized, or securities convertible
into shares of its stock of any class or series, whether now or
hereafter authorized, for such consideration as may be deemed advisable
by the Board of Directors and without any action by the shareholders.
(2) No holder of any stock or any other securities of the
Corporation, whether now or hereafter authorized, shall have any
preemptive right to subscribe for or purchase any stock or any other
securities of the Corporation other than such, if any, as the Board of
Directors, in its sole discretion, may determine and at such price or
prices and upon such other terms as the Board of Directors, in its sole
discretion, may fix; and any stock or other securities which the Board
of Directors may determine to offer for subscription may, as the Board
of Directors in its sole discretion shall determine, be offered to the
holders of any class, series or type of stock or other securities at the
PAGE 8
time outstanding to the exclusion of the holders of any or all other
classes, series or types of stock or other securities at the time
outstanding.
(3) The Board of Directors of the Corporation shall, consistent
with applicable law, have power in its sole discretion to determine from
time to time in accordance with sound accounting practice or other
reasonable valuation methods what constitutes annual or other net
profits, earnings, surplus, or net assets in excess of capital; to
determine that retained earnings or surplus shall remain in the hands of
the Corporation; to set apart out of any funds of the Corporation such
reserve or reserves in such amount or amounts and for such proper
purpose or purposes as it shall determine and to abolish any such
reserve or any part thereof; to distribute and pay distributions or
dividends in stock, cash or other securities or property, out of surplus
or any other funds or amounts legally available therefor, at such times
and to the shareholders of record on such dates as it may, from time to
time, determine; and to determine whether and to what extent and at what
times and places and under what conditions and regulations the books,
accounts and documents of the Corporation, or any of them, shall be open
to the inspection of shareholders, except as otherwise provided by
statute or by the By-Laws, and, except as so provided, no shareholder
shall have any right to inspect any book, account or document of the
Corporation unless authorized so to do by resolution of the Board of
Directors.
(4) Notwithstanding any provision of law requiring the
authorization of any action by a greater proportion than a majority of
the total number of shares of all classes and series of capital stock or
of the total number of shares of any class or series of capital stock
entitled to vote as a separate class, such action shall be valid and
effective if authorized by the affirmative vote of the holders of a
majority of the total number of shares of all classes and series
outstanding and entitled to vote thereon, or of the class or series
entitled to vote thereon as a separate class, as the case may be, except
as otherwise provided in the charter of the Corporation.
(5) The Corporation shall indemnify (i) its past and present
directors and officers, whether serving the Corporation or at its
request any other entity, to the full extent required or permitted by
the General Laws of the State of Maryland now or hereafter in force,
including the advance of expenses under the procedures and to the full
extent permitted by law, and (ii) other employees and agents to such
extent as shall be authorized by the Board of Directors or the By-Laws
and as permitted by law. Nothing contained herein shall be construed to
protect any director or officer of the Corporation against any liability
to the Corporation or its security holders to which he would otherwise
be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct
of his office. The foregoing rights of indemnification shall not be
exclusive of any other rights to which those seeking indemnification may
be entitled. The Board of Directors may take such action as is
necessary to carry out these indemnification provisions and is expressly
empowered to adopt, approve and amend from time to time such by-laws,
resolutions or contracts implementing such provisions or such further
indemnification arrangements as may be permitted by law. No amendment
PAGE 9
of the charter of the Corporation or repeal of any of its provisions
shall limit or eliminate the right of indemnification provided hereunder
with respect to acts or omissions occurring prior to such amendment or
repeal.
(6) To the fullest extent permitted by Maryland statutory or
decisional law, as amended or interpreted, and the Investment Company
Act, no director or officer of the Corporation shall be personally
liable to the Corporation or its shareholders for money damages;
provided, however, that nothing herein shall be construed to protect any
director or officer of the Corporation against any liability to the
Corporation or its security holders to which he would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence,
or reckless disregard of the duties involved in the conduct of his
office. No amendment of the charter of the Corporation or repeal of any
of its provisions shall limit or eliminate the limitation of liability
provided to directors and officers hereunder with respect to any act or
omission occurring prior to such amendment or repeal.
(7) The Corporation reserves the right from time to time to make
any amendments of its charter which may now or hereafter be authorized
by law, including any amendments changing the terms or contract rights,
as expressly set forth in its charter, of any of its outstanding stock
by classification, reclassification or otherwise.
(b) The enumeration and definition of particular powers of the Board
of Directors included in the foregoing shall in no way be limited or
restricted by reference to or inference from the terms of any other clause of
this or any other Article of the charter of the Corporation, or construed as
or deemed by inference or otherwise in any manner to exclude or limit any
powers conferred upon the Board of Directors under the General Laws of the
State of Maryland now or hereafter in force.
NINTH: The duration of the Corporation shall be perpetual.
IN WITNESS WHEREOF, I have signed these Articles of Incorporation,
acknowledging the same to be my act, on this 31st day of January, 1994.
Witness:
/s/Lenora V. Hornung /s/Henry H. Hopkins
_____________________________ ______________________________________
Henry H. Hopkins
PAGE 1
BY-LAWS
OF
T. ROWE PRICE EQUITY SERIES, INC.
PAGE 2
TABLE OF CONTENTS
Page
ARTICLE I. NAME OF CORPORATION, LOCATION OF OFFICES AND SEAL . . .1
1.01. Name. . . . . . . . . . . . . . . . . . . . . . . . . .1
1.02. Principal Office. . . . . . . . . . . . . . . . . . . .1
1.03. Seal. . . . . . . . . . . . . . . . . . . . . . . . . .1
ARTICLE II. SHAREHOLDERS. . . . . . . . . . . . . . . . . . . . . .1
2.01. Annual Meetings . . . . . . . . . . . . . . . . . . . .1
2.02. Special Meetings. . . . . . . . . . . . . . . . . . . .2
2.03. Place of Meetings . . . . . . . . . . . . . . . . . . .2
2.04. Notice of Meetings. . . . . . . . . . . . . . . . . . .2
2.05. Voting - in General . . . . . . . . . . . . . . . . . .2
2.06. Shareholders Entitled to Vote . . . . . . . . . . . . .3
2.07. Voting - Proxies. . . . . . . . . . . . . . . . . . . .3
2.08. Quorum. . . . . . . . . . . . . . . . . . . . . . . . .3
2.09. Absence of Quorum . . . . . . . . . . . . . . . . . . .3
2.10. Stock Ledger and List of Shareholders . . . . . . . . .4
2.11. Informal Action by Shareholders . . . . . . . . . . . .4
ARTICLE III. BOARD OF DIRECTORS. . . . . . . . . . . . . . . . . . .4
3.01. Number and Term of Office . . . . . . . . . . . . . . .4
3.02. Qualification of Directors. . . . . . . . . . . . . . .4
3.03. Election of Directors . . . . . . . . . . . . . . . . .5
3.04. Removal of Directors. . . . . . . . . . . . . . . . . .5
3.05. Vacancies and Newly Created Directorships . . . . . . .5
3.06. General Powers. . . . . . . . . . . . . . . . . . . . .5
3.07. Power to Issue and Sell Stock . . . . . . . . . . . . .6
3.08. Power to Declare Dividends. . . . . . . . . . . . . . .6
3.09. Annual and Regular Meetings . . . . . . . . . . . . . .6
3.10. Special Meetings. . . . . . . . . . . . . . . . . . . .6
3.11. Notice. . . . . . . . . . . . . . . . . . . . . . . . .7
3.12. Waiver of Notice. . . . . . . . . . . . . . . . . . . .7
3.13. Quorum and Voting . . . . . . . . . . . . . . . . . . .7
3.14. Conference Telephone. . . . . . . . . . . . . . . . . .7
3.15. Compensation. . . . . . . . . . . . . . . . . . . . . .7
3.16. Action without a Meeting. . . . . . . . . . . . . . . .7
3.17. Director Emeritus . . . . . . . . . . . . . . . . . . .7
ARTICLE IV. EXECUTIVE COMMITTEE AND OTHER COMMITTEES. . . . . . . .8
4.01. How Constituted . . . . . . . . . . . . . . . . . . . .8
4.02. Powers of the Executive Committee . . . . . . . . . . .8
4.03. Other Committees of the Board of Directors. . . . . . .8
4.04. Proceedings, Quorum and Manner of Acting. . . . . . . .8
4.05. Other Committees. . . . . . . . . . . . . . . . . . . .8
PAGE 3
ARTICLE V. OFFICERS. . . . . . . . . . . . . . . . . . . . . . . .9
5.01. General . . . . . . . . . . . . . . . . . . . . . . . .9
5.02. Election, Term of Office and Qualifications . . . . . .9
5.03. Resignation . . . . . . . . . . . . . . . . . . . . . .9
5.04. Removal . . . . . . . . . . . . . . . . . . . . . . . .9
5.05. Vacancies and Newly Created Offices . . . . . . . . . .9
5.06. Chairman of the Board . . . . . . . . . . . . . . . . .9
5.07. President . . . . . . . . . . . . . . . . . . . . . . .10
5.08. Vice President. . . . . . . . . . . . . . . . . . . . .10
5.09. Treasurer and Assistant Treasurers. . . . . . . . . . .10
5.10. Secretary and Assistant Secretaries . . . . . . . . . .11
5.11. Subordinate Officers. . . . . . . . . . . . . . . . . .11
5.12. Remuneration. . . . . . . . . . . . . . . . . . . . . .11
5.13. Surety Bond . . . . . . . . . . . . . . . . . . . . . .11
ARTICLE VI. CUSTODY OF SECURITIES AND CASH. . . . . . . . . . . . .11
6.01. Employment of a Custodian . . . . . . . . . . . . . . .11
6.02. Central Certificate Service . . . . . . . . . . . . . .12
6.03. Cash Assets . . . . . . . . . . . . . . . . . . . . . .12
6.04. Free Cash Accounts. . . . . . . . . . . . . . . . . . .12
6.05. Action Upon Termination of Custodian Agreement. . . . .12
6.06. Other Arrangements. . . . . . . . . . . . . . . . . . .12
ARTICLE VII. EXECUTION OF INSTRUMENTS, VOTING OF SECURITIES. . . . .13
7.01. Execution of Instruments. . . . . . . . . . . . . . . .13
7.02. Voting of Securities. . . . . . . . . . . . . . . . . .13
ARTICLE VIII. CAPITAL STOCK. . . . . . . . . . . . . . . . . . . . .13
8.01. Ownership of Shares . . . . . . . . . . . . . . . . . .13
8.02. Transfer of Capital Stock . . . . . . . . . . . . . . .13
8.03. Transfer Agents and Registrars. . . . . . . . . . . . .14
8.04. Transfer Regulations. . . . . . . . . . . . . . . . . .14
8.05. Fixing of Record Date . . . . . . . . . . . . . . . . .14
ARTICLE IX. FISCAL YEAR, ACCOUNTANT . . . . . . . . . . . . . . . .14
9.01. Fiscal Year . . . . . . . . . . . . . . . . . . . . . .14
9.02. Accountant. . . . . . . . . . . . . . . . . . . . . . .14
ARTICLE X. INDEMNIFICATION AND INSURANCE . . . . . . . . . . . . .15
10.01. Indemnification and Payment of Expenses in Advance. . .15
10.02. Insurance of Officers, Directors, Employees
and Agents. . . . . . . . . . . . . . . . . . . . . . .16
10.03. Amendment . . . . . . . . . . . . . . . . . . . . . . .17
PAGE 4
ARTICLE XI. AMENDMENTS. . . . . . . . . . . . . . . . . . . . . . .17
11.01. General . . . . . . . . . . . . . . . . . . . . . . . .17
11.02. By Shareholders Only. . . . . . . . . . . . . . . . . .17
ARTICLE XII. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . .17
12.01 Use of the Term "Annual Meeting". . . . . . . . . . . .17
PAGE 5
T. ROWE PRICE EQUITY SERIES, INC.
(A Maryland Corporation)
BY-LAWS
ARTICLE I
NAME OF CORPORATION,
LOCATION OF OFFICES AND SEAL
Section 1.01.Name: The name of the Corporation is T. ROWE PRICE EQUITY
SERIES, INC.
Section 1.02.Principal Office: The principal office of the Corporation
in the State of Maryland shall be located in the City of Baltimore. The
Corporation may, in addition, establish and maintain such other offices and
places of business, within or outside the State of Maryland, as the Board of
Directors may from time to time determine. [MGCL, Sections 2-103(4), 2-
108(a)(1)]
Section 1.03.Seal: The corporate seal of the Corporation shall be
circular in form, and shall bear the name of the Corporation, the year of its
incorporation, and the words "Corporate Seal, Maryland." The form of the seal
shall be subject to alteration by the Board of Directors and the seal may be
used by causing it or a facsimile to be impressed or affixed or printed or
otherwise reproduced. In lieu of affixing the corporate seal to any document
it shall be sufficient to meet the requirements of any law, rule, or
regulation relating to a corporate seal to affix the word "(Seal)" adjacent to
the signature of the authorized officer of the Corporation. Any officer or
Director of the Corporation shall have authority to affix the corporate seal
of the Corporation to any document requiring the same. [MGCL, Sections 1-
304(b), 2-103(3)]
ARTICLE II
SHAREHOLDERS
Section 2.01.Annual Meetings: The Corporation shall not be required to
hold an annual meeting of its shareholders in any year unless the Investment
Company Act of 1940 requires an election of directors by shareholders. In the
event that the Corporation shall be so required to hold an annual meeting,
PAGE 6
such meeting shall be held at a date and time set by the Board of Directors,
which date shall be no later than 120 days after the occurrence of the event
requiring the meeting. Any shareholders' meeting held in accordance with the
preceding sentence shall for all purposes constitute the annual meeting of
shareholders for the fiscal year of the corporation in which the meeting is
held. At any such meeting, the shareholders shall elect directors to hold the
offices of any directors who have held office for more than one year or who
have been elected by the Board of Directors to fill vacancies which result
from any cause. Except as the Articles of Incorporation or statute provides
otherwise, Directors may transact any business within the powers of the
Corporation as may properly come before the meeting. Any business of the
Corporation may be transacted at the annual meeting without being specially
designated in the notice, except such business as is specifically required by
statute to be stated in the notice. [MGCL, Section 2-501]
Section 2.02.Special Meetings: Special meetings of the shareholders may
be called at any time by the Chairman of the Board, the President, any Vice
President, or by the Board of Directors. Special meetings of the shareholders
shall be called by the Secretary on the written request of shareholders
entitled to cast at least ten (10) percent of all the votes entitled to be
cast at such meeting, provided that (a) such request shall state the purpose
or purposes of the meeting and the matters proposed to be acted on, and (b)
the shareholders requesting the meeting shall have paid to the Corporation the
reasonably estimated cost of preparing and mailing the notice thereof, which
the Secretary shall determine and specify to such shareholders. Unless
requested by shareholders entitled to cast a majority of all the votes
entitled to be cast at the meeting, a special meeting need not be called to
consider any matter which is substantially the same as a matter voted upon at
any special meeting of the shareholders held during the preceding twelve (12)
months. [MGCL, Section 2-502]
Section 2.03.Place of Meetings: All shareholders' meetings shall be
held at such place within the United States as may be fixed from time to time
by the Board of Directors. [MGCL, Section 2-503]
Section 2.04.Notice of Meetings: Not less than ten (10) days, nor more
than ninety (90) days before each shareholders' meeting, the Secretary or an
Assistant Secretary of the Corporation shall give to each shareholder entitled
to vote at the meeting, and each other shareholder entitled to notice of the
meeting, written notice stating (1) the time and place of the meeting, and (2)
the purpose or purposes of the meeting if the meeting is a special meeting or
if notice of the purpose is required by statute to be given. Such notice
shall be personally delivered to the shareholder, or left at his residence or
usual place of business, or mailed to him at his address as it appears on the
records of the Corporation. Notice shall be deemed to be given when deposited
in the United States mail addressed to the shareholders as aforesaid. No
notice of a shareholders' meeting need be given to any shareholder who shall
sign a written waiver of such notice, whether before or after the meeting,
which is filed with the records of shareholders' meetings, or to any
shareholder who is present at the meeting in person or by proxy. Notice of
adjournment of a shareholders' meeting to another time or place need not be
given if such time and place are announced at the meeting, unless the
adjournment is for more than one hundred twenty (120) days after the original
record date. Irregularities in the notice of any meeting to, or the
nonreceipt of any such notice by, any of the stockholders shall not invalidate
any action otherwise properly taken by or at any such meeting. [MGCL,
PAGE 7
Sections 2-504, 2-511(d)]
Section 2.05.Voting - In General: Except as otherwise specifically
provided in the Articles of Incorporation or these By-Laws, or as required by
provisions of the Investment Company Act with respect to the vote of a series,
if any, of the Corporation, at every shareholders' meeting, each shareholder
shall be entitled to one vote for each share of stock of the Corporation
validly issued and outstanding and held by such shareholder, except that no
shares held by the Corporation shall be entitled to a vote. Fractional shares
shall be entitled to fractional votes. Except as otherwise specifically
provided in the Articles of Incorporation, or these By-Laws, or as required by
provisions of the Investment Company Act, a majority of all the votes cast at
a meeting at which a quorum is present is sufficient to approve any matter
which properly comes before the meeting. The vote upon any question shall be
by ballot whenever requested by any person entitled to vote, but, unless such
a request is made, voting may be conducted in any way approved by the meeting.
[MGCL, Sections 2-214(a)(i), 2-506(a)(2), 2-507(a), 2-509(b)]
At any meeting at which there is an election of Directors, the Chairman
of the meeting may, and upon the request of the holders of ten (10) percent of
the stock entitled to vote at such election shall, appoint two inspectors of
election who shall first subscribe an oath or affirmation to execute
faithfully the duties of inspectors at such election with strict impartiality
and according to the best of their ability, and shall, after the election,
make a certificate of the result of the vote taken. No candidate for the
office of Director shall be appointed as an inspector.
Section 2.06.Shareholders Entitled to Vote: If, pursuant to Section
8.05 hereof, a record date has been fixed for the determination of
shareholders entitled to notice of or to vote at any shareholders' meeting,
each shareholder of the Corporation shall be entitled to vote in person or by
proxy, each share or fraction of a share of stock outstanding in his name on
the books of the Corporation on such record date. If no record date has been
fixed for the determination of shareholders, the record date for the
determination of shareholders entitled to notice of or to vote at a meeting of
shareholders shall be at the close of business on the day on which notice of
the meeting is mailed or the 30th day before the meeting, whichever is the
closer date to the meeting, or, if notice is waived by all shareholders, at
the close of business on the tenth (10th) day next preceding the date of the
meeting. [MGCL, Sections 2-507, 2-511]
Section 2.07.Voting - Proxies: The right to vote by proxy shall exist
only if the instrument authorizing such proxy to act shall have been executed
in writing by the shareholder himself, or by his attorney thereunto duly
authorized in writing. No proxy shall be valid more than eleven (11) months
after its date unless it provides for a longer period. All proxies shall be
delivered to the Secretary of the Corporation or to the person acting as
Secretary of the meeting before being voted, who shall decide all questions
concerning qualification of voters, the validity of proxies, and the
acceptance or rejection of votes. If inspectors of election have been
appointed by the chairman of the meeting, such inspectors shall decide all
such questions. A proxy with respect to stock held in the name of two or more
persons shall be valid if executed by one of them unless at or prior to
exercise of such proxy the Corporation receives a specific written notice to
the contrary from any one of them. A proxy purporting to be executed by or on
behalf of a shareholder shall be deemed valid unless challenged at or prior to
PAGE 8
its exercise. [MGCL, Section 2-507(b)]
Section 2.08.Quorum: The presence at any shareholders' meeting, in
person or by proxy, of shareholders entitled to cast a majority of the votes
entitled to be cast at the meeting shall constitute a quorum. [MGCL, Section
2-506(a)]
Section 2.09.Absence of Quorum: In the absence of a quorum, the holders
of a majority of shares entitled to vote at the meeting and present thereat in
person or by proxy, or, if no shareholder entitled to vote is present in
person or by proxy, any officer present who is entitled to preside at or act
as Secretary of such meeting, may adjourn the meeting sine die or from time to
time. Any business that might have been transacted at the meeting originally
called may be transacted at any such adjourned meeting at which a quorum is
present.
Section 2.10.Stock Ledger and List of Shareholders: It shall be the
duty of the Secretary or Assistant Secretary of the Corporation to cause an
original or duplicate stock ledger to be maintained at the office of the
Corporation's transfer agent, containing the names and addresses of all
shareholders and the number of shares of each class held by each shareholder.
Such stock ledger may be in written form, or any other form capable of being
converted into written form within a reasonable time for visual inspection.
Any one or more persons, who together are and for at least six (6) months have
been shareholders of record of at least five percent (5%) of the outstanding
capital stock of the Corporation, may submit (unless the Corporation at the
time of the request maintains a duplicate stock ledger at its principal
office) a written request to any officer of the Corporation or its resident
agent in Maryland for a list of the shareholders of the Corporation. Within
twenty (20) days after such a request, there shall be prepared and filed at
the Corporation's principal office a list, verified under oath by an officer
of the Corporation or by its stock transfer agent or registrar, which sets
forth the name and address of each shareholder and the number of shares of
each class which the shareholder holds. [MGCL, Sections 2-209, 2-513]
Section 2.11.Informal Action By Shareholders: Any action required or
permitted to be taken at a meeting of shareholders may be taken without a
meeting if the following are filed with the records of shareholders' meetings:
(a) A unanimous written consent which sets forth the action and is
signed by each shareholder entitled to vote on the matter; and
(b) A written waiver of any right to dissent signed by each
shareholder entitled to notice of the meeting, but not entitled to
vote at it.
[MGCL, Section 2-505]
ARTICLE III
BOARD OF DIRECTORS
Section 3.01.Number and Term of Office: The Board of Directors shall
consist of one (1) Director, which number may be increased by a resolution of
PAGE 9
a majority of the entire Board of Directors, provided that the number of
Directors shall not be more than fifteen (15) nor less than the lesser of (i)
three (3) or (ii) the number of shareholders of the Corporation. Each
Director (whenever elected) shall hold office until the next annual meeting of
shareholders and until his successor is elected and qualifies or until his
earlier death, resignation, or removal. [MGCL, Sections 2-402, 2-404, 2-405]
Section 3.02.Qualification of Directors: No member of the Board of
Directors need be a shareholder of the Corporation, but at least one member of
the Board of Directors shall be a person who is not an interested person (as
such term is defined in the Investment Company Act) of the investment adviser
of the Corporation, nor an officer or employee of the Corporation. [MGCL,
Section 2-403; Investment Company Act, Section 10(d)]
Section 3.03.Election of Directors: Until the first annual meeting of
shareholders, or until successors are duly elected and qualified, the Board of
Directors shall consist of the persons named as such in the Articles of
Incorporation. Thereafter, except as otherwise provided in Sections 3.04 and
3.05 hereof, at each annual meeting, the shareholders shall elect Directors to
hold office until the next annual meeting and/or until their successors are
elected and qualify. In the event that Directors are not elected at an annual
shareholders' meeting, then Directors may be elected at a special
shareholders' meeting. Directors shall be elected by vote of the holders of a
plurality of the shares present in person or by proxy and entitled to vote.
[MGCL, Section 2-404]
Section 3.04.Removal of Directors: At any meeting of shareholders, duly
called and at which a quorum is present, the shareholders may, by the
affirmative vote of the holders of a majority of the votes entitled to be cast
thereon, remove any Director or Directors from office, either with or without
cause, and may elect a successor or successors to fill any resulting vacancies
for the unexpired terms of removed Directors. [MGCL, Sections 2-406, 2-407]
Section 3.05.Vacancies and Newly Created Directorships: If any
vacancies occur in the Board of Directors by reason of resignation, removal or
otherwise, or if the authorized number of Directors is increased, the
Directors then in office shall continue to act, and such vacancies (if not
previously filled by the shareholders) may be filled by a majority of the
Directors then in office, whether or not sufficient to constitute a quorum,
provided that, immediately after filling such vacancy, at least two-thirds of
the Directors then holding office shall have been elected to such office by
the shareholders of the Corporation. In the event that at any time, other
than the time preceding the first meeting of shareholders, less than a
majority of the Directors of the Corporation holding office at that time were
so elected by the shareholders, a meeting of the shareholders shall be held
promptly and in any event within sixty (60) days for the purpose of electing
Directors to fill any existing vacancies in the Board of Directors unless the
Securities and Exchange Commission shall by order extend such period. Except
as provided in Section 3.04 hereof, a Director elected by the Board of
Directors to fill a vacancy shall be elected to hold office until the next
annual meeting of shareholders or until his successor is elected and
qualifies. [MGCL, Section 2-407; Investment Company Act, Section 16(a)]
Section 3.06.General Powers:
(a) The property, business, and affairs of the Corporation shall be
PAGE 10
managed under the direction of the Board of Directors which may exercise all
the powers of the Corporation except such as are by law, by the Articles of
Incorporation, or by these By-Laws conferred upon or reserved to the
shareholders of the Corporation. [MGCL, Section 2-401]
(b) All acts done by any meeting of the Directors or by any person
acting as a Director, so long as his successor shall not have been duly
elected or appointed, shall, notwithstanding that it be afterwards discovered
that there was some defect in the election of the Directors or such person
acting as a Director or that they or any of them were disqualified, be as
valid as if the Directors or such person, as the case may be, had been duly
elected and were or was qualified to be Directors or a Director of the
Corporation.
Section 3.07.Power to Issue and Sell Stock: The Board of Directors may
from time to time authorize by resolution the issuance and sale of any of the
Corporation's authorized shares to such persons as the Board of Directors
shall deem advisable and such resolution shall set the minimum price or value
of consideration for the stock or a formula for its determination, and shall
include a fair description of any consideration other than money and a
statement of the actual value of such consideration as determined by the Board
of Directors or a statement that the Board of Directors has determined that
the actual value is or will be not less than a certain sum. [MGCL, Section 2-
203]
Section 3.08.Power to Declare Dividends:
(a) The Board of Directors, from time to time as it may deem
advisable, may declare and the Corporation pay dividends, in cash, property,
or shares of the Corporation available for dividends out of any source
available for dividends, to the shareholders according to their respective
rights and interests. [MGCL, Section 2-309]
(b) The Board of Directors shall cause to be accompanied by a written
statement any dividend payment wholly or partly from any source other than the
Corporation's accumulated undistributed net income (determined in accordance
with good accounting practice and the rules and regulations of the Securities
and Exchange Commission then in effect) not including profits or losses
realized upon the sale of securities or other properties. Such statement
shall adequately disclose the source or sources of such payment and the basis
of calculation and shall be otherwise in such form as the Securities and
Exchange Commission may prescribe. [Investment Company Act, Section 19; SEC
Rule 19a-1; MGCL, Section 2-309(c)]
(c) Notwithstanding the above provisions of this Section 3.08, the
Board of Directors may at any time declare and distribute pro rata among the
shareholders a stock dividend out of the Corporation's authorized but unissued
shares of stock, including any shares previously purchased by the Corporation,
provided that such dividend shall not be distributed in shares of any class
with respect to any shares of a different class. The shares so distributed
shall be issued at the par value thereof, and there shall be transferred to
stated capital, at the time such dividend is paid, an amount of surplus equal
to the aggregate par value of the shares issued as a dividend and there may be
transferred from earned surplus to capital surplus such additional amount as
the Board of Directors may determine. [MGCL, Section 2-309]
PAGE 11
Section 3.09.Annual and Regular Meetings: The annual meeting of the
Board of Directors for choosing officers and transacting other proper business
shall be held after the annual shareholders' meeting at such time and place as
may be specified in the notice of such meeting of the Board of Directors or,
in the absence of such annual shareholders' meeting, at such time and place as
the Board of Directors may provide. The Board of Directors from time to time
may provide by resolution for the holding of regular meetings and fix their
time and place (within or outside the State of Maryland). [MGCL, Section 2-
409(a)]
Section 3.10.Special Meetings: Special meetings of the Board of
Directors shall be held whenever called by the Chairman of the Board, the
President (or, in the absence or disability of the President, by any Vice
President), the Treasurer, or two or more Directors, at the time and place
(within or outside the State of Maryland) specified in the respective notices
or waivers of notice of such meetings.
Section 3.11.Notice: Notice of annual, regular, and special meetings
shall be in writing, stating the time and place, and shall be mailed to each
Director at his residence or regular place of business or caused to be
delivered to him personally or to be transmitted to him by telegraph, cable,
or wireless at least two (2) days before the day on which the meeting is to be
held. Except as otherwise required by the By-Laws or the Investment Company
Act, such notice need not include a statement of the business to be transacted
at, or the purpose of, the meeting. [MGCL, Section 2-409(b)]
Section 3.12.Waiver of Notice: No notice of any meeting need be given
to any Director who is present at the meeting or to any Director who signs a
waiver of the notice of the meeting (which waiver shall be filed with the
records of the meeting), whether before or after the meeting. [MGCL, Section
2-409(c)]
Section 3.13.Quorum and Voting: At all meetings of the Board of
Directors the presence of one-third of the total number of Directors
authorized, but not less than two (2) Directors if there are at least two
directors, shall constitute a quorum. In the absence of a quorum, a majority
of the Directors present may adjourn the meeting, from time to time, until a
quorum shall be present. The action of a majority of the Directors present at
a meeting at which a quorum is present shall be the action of the Board of
Directors unless the concurrence of a greater proportion is required for such
action by law, by the Articles of Incorporation or by these By-Laws. [MGCL,
Section 2-408]
Section 3.14.Conference Telephone: Members of the Board of Directors or
of any committee designated by the Board, may participate in a meeting of the
Board or of such committee by means of a conference telephone or similar
communications equipment if all persons participating in the meeting can hear
each other at the same time, and participation by such means shall constitute
presence in person at such meeting. [MGCL, Section 2-409(d)]
Section 3.15.Compensation: Each Director may receive such remuneration
for his services as shall be fixed from time to time by resolution of the
Board of Directors.
Section 3.16.Action Without a Meeting: Except as otherwise provided
under the Investment Company Act, any action required or permitted to be taken
PAGE 12
at any meeting of the Board of Directors or any committee thereof may be taken
without a meeting if a unanimous written consent which sets forth the action
is signed by all members of the Board or of such committee and such written
consent is filed with the minutes of proceedings of the Board or committee.
[MGCL, Section 2-408(c)]
Section 3.17.Director Emeritus: Upon the retirement of a Director of
the Corporation, the Board of Directors may designate such retired Director as
a Director Emeritus. The position of Director Emeritus shall be honorary only
and shall not confer upon such Director Emeritus any responsibility, or voting
authority, whatsoever with respect to the Corporation. A Director Emeritus
may, but shall not be required to, attend the meetings of the Board of
Directors and receive materials normally provided Directors relating to the
Corporation. The Board of Directors may establish such compensation as it may
deem appropriate under the circumstances to be paid by the Corporation to a
Director Emeritus.
ARTICLE IV
EXECUTIVE COMMITTEE AND OTHER COMMITTEES
Section 4.01.How Constituted: By resolution adopted by the Board of
Directors, the Board may appoint from among its members one or more
committees, including an Executive Committee, each consisting of at least two
(2) Directors. Each member of a committee shall hold office during the
pleasure of the Board. [MGCL, Section 2-411]
Section 4.02.Powers of the Executive Committee: Unless otherwise
provided by resolution of the Board of Directors, the Executive Committee, in
the intervals between meetings of the Board of Directors, shall have and may
exercise all of the powers of the Board of Directors to manage the business
and affairs of the Corporation except the power to:
(a) Declare dividends or distributions on stock;
(b) Issue stock other than as provided in Section 2-411(b) of
Corporations and Associations Article of the Annotated Code of
Maryland;
(c) Recommend to the shareholders any action which requires
shareholder approval;
(d) Amend the By-Laws; or
(e) Approve any merger or share exchange which does not require
shareholder approval.
[MGCL, Section 2-411(a)]
Section 4.03.Other Committees of the Board of Directors: To the extent
provided by resolution of the Board, other committees shall have and may
exercise any of the powers that may lawfully be granted to the Executive
Committee. [MGCL, Section 2-411(a)]
PAGE 13
Section 4.04.Proceedings, Quorum, and Manner of Acting: In the absence
of appropriate resolution of the Board of Directors, each committee may adopt
such rules and regulations governing its proceedings, quorum and manner of
acting as it shall deem proper and desirable, provided that the quorum shall
not be less than two (2) Directors. In the absence of any member of any such
committee, the members thereof present at any meeting, whether or not they
constitute a quorum, may appoint a member of the Board of Directors to act in
the place of such absent member. [MGCL, Section 2-411(c)]
Section 4.05.Other Committees: The Board of Directors may appoint other
committees, each consisting of one or more persons who need not be Directors.
Each such committee shall have such powers and perform such duties as may be
assigned to it from time to time by the Board of Directors, but shall not
exercise any power which may lawfully be exercised only by the Board of
Directors or a committee thereof.
ARTICLE V
OFFICERS
Section 5.01.General: The officers of the Corporation shall be a
President, one or more Vice Presidents (one or more of whom may be designated
Executive Vice President), a Secretary, and a Treasurer, and may include one
or more Assistant Vice Presidents, one or more Assistant Secretaries, one or
more Assistant Treasurers, and such other officers as may be appointed in
accordance with the provisions of Section 5.11 hereof. The Board of Directors
may elect, but shall not be required to elect, a Chairman of the Board.
[MGCL, Section 2-412]
Section 5.02.Election, Term of Office and Qualifications: The officers
of the Corporation (except those appointed pursuant to Section 5.11 hereof)
shall be elected by the Board of Directors at its first meeting and thereafter
at each annual meeting of the Board. If any officer or officers are not
elected at any such meeting, such officer or officers may be elected at any
subsequent regular or special meeting of the Board. Except as provided in
Sections 5.03, 5.04, and 5.05 hereof, each officer elected by the Board of
Directors shall hold office until the next annual meeting of the Board of
Directors and until his successor shall have been chosen and qualified. Any
person may hold two or more offices of the Corporation, except that neither
the Chairman of the Board, nor the President, may hold the office of Vice
President, but no person shall execute, acknowledge, or verify any instrument
in more than one capacity if such instrument is required by law, the Articles
of Incorporation, or these By-Laws to be executed, acknowledged, or verified
by two or more officers. The Chairman of the Board shall be selected from
among the Directors of the Corporation and may hold such office only so long
as he continues to be a Director. No other officer need be a Director.
[MGCL, Sections 2-412, 2-413 and 2-415]
Section 5.03.Resignation: Any officer may resign his office at any time
by delivering a written resignation to the Board of Directors, the President,
the Secretary, or any Assistant Secretary. Unless otherwise specified
therein, such resignation shall take effect upon delivery.
PAGE 14
Section 5.04.Removal: Any officer may be removed from office by the
Board of Directors whenever in the judgment of the Board of Directors the best
interests of the Corporation will be served thereby. [MGCL, Section 2-413(c)]
Section 5.05Vacancies and Newly Created Offices: If any vacancy shall
occur in any office by reason of death, resignation, removal, disqualification
or other cause, or if any new office shall be created, such vacancies or newly
created offices may be filled by the Board of Directors at any meeting or, in
the case of any office created pursuant to Section 5.11 hereof, by any officer
upon whom such power shall have been conferred by the Board of Directors.
[MGCL, Section 2-413(d)]
Section 5.06.Chairman of the Board: Unless otherwise provided by
resolution of the Board of Directors, the Chairman of the Board, if there be
such an officer, shall be the chief executive and operating officer of the
Corporation, shall preside at all shareholders' meetings, and at all meetings
of the Board of Directors. He shall be ex officio a member of all standing
committees of the Board of Directors. Subject to the supervision of the Board
of Directors, he shall have general charge of the business, affairs, property,
and operation of the Corporation and its officers, employees, and agents. He
may sign (unless the President or a Vice President shall have signed)
certificates representing stock of the Corporation authorized for issuance by
the Board of Directors and shall have such other powers and perform such other
duties as may be assigned to him from time to time by the Board of Directors.
Section 5.07.President: Unless otherwise provided by resolution of the
Board of Directors, the President shall, at the request of or in the absence
or disability of the Chairman of the Board, or if no Chairman of the Board has
been chosen, he shall preside at all shareholders' meetings and at all
meetings of the Board of Directors and shall in general exercise the powers
and perform the duties of the Chairman of the Board. He may sign (unless the
Chairman or a Vice President shall have signed) certificates representing
stock of the Corporation authorized for issuance by the Board of Directors.
Except as the Board of Directors may otherwise order, he may sign in the name
and on behalf of the Corporation all deeds, bonds, contracts, or agreements.
He shall exercise such other powers and perform such other duties as from time
to time may be assigned to him by the Board of Directors.
Section 5.08.Vice President: The Board of Directors shall, from time to
time, designate and elect one or more Vice Presidents (one or more of whom may
be designated Executive Vice President) who shall have such powers and perform
such duties as from time to time may be assigned to them by the Board of
Directors or the President. At the request or in the absence or disability of
the President, the Vice President (or, if there are two or more Vice
Presidents, the Vice President in order of seniority of tenure in such office
or in such other order as the Board of Directors may determine) may perform
all the duties of the President and, when so acting, shall have all the powers
of and be subject to all the restrictions upon the President. Any Vice
President may sign (unless the Chairman, the President, or another Vice
President shall have signed) certificates representing stock of the
Corporation authorized for issuance by the Board of Directors.
Section 5.09.Treasurer and Assistant Treasurers: The Treasurer shall be
the principal financial and accounting officer of the Corporation and shall
have general charge of the finances and books of account of the Corporation.
Except as otherwise provided by the Board of Directors, he shall have general
PAGE 15
supervision of the funds and property of the Corporation and of the
performance by the custodian of its duties with respect thereto. He may
countersign (unless an Assistant Treasurer or Secretary or Assistant Secretary
shall have countersigned) certificates representing stock of the Corporation
authorized for issuance by the Board of Directors. He shall render to the
Board of Directors, whenever directed by the Board, an account of the
financial condition of the Corporation and of all his transactions as
Treasurer; and as soon as possible after the close of each fiscal year he
shall make and submit to the Board of Directors a like report for such fiscal
year. He shall cause to be prepared annually a full and correct statement of
the affairs of the Corporation, including a balance sheet and a financial
statement of operations for the preceding fiscal year, which shall be
submitted at the annual meeting of shareholders and filed within twenty (20)
days thereafter at the principal office of the Corporation. He shall perform
all the acts incidental to the office of the Treasurer, subject to the control
of the Board of Directors. Any Assistant Treasurer may perform such duties of
the Treasurer as the Treasurer or the Board of Directors may assign, and, in
the absence of the Treasurer, he may perform all the duties of the Treasurer.
Section 5.10.Secretary and Assistant Secretaries: The Secretary shall
attend to the giving and serving of all notices of the Corporation and shall
record all proceedings of the meetings of the shareholders and Directors in
one or more books to be kept for that purpose. He shall keep in safe custody
the seal of the Corporation and shall have charge of the records of the
Corporation, including the stock books and such other books and papers as the
Board of Directors may direct and such books, reports, certificates and other
documents required by law to be kept, all of which shall at all reasonable
times be open to inspection by any Director. He shall countersign (unless the
Treasurer, an Assistant Treasurer or an Assistant Secretary shall have
countersigned) certificates representing stock of the Corporation authorized
for issuance by the Board of Directors. He shall perform such other duties as
appertain to his office or as may be required by the Board of Directors. Any
Assistant Secretary may perform such duties of the Secretary as the Secretary
or the Board of Directors may assign, and, in the absence of the Secretary, he
may perform all the duties of the Secretary.
Section 5.11.Subordinate Officers: The Board of Directors from time to
time may appoint such other officers or agents as it may deem advisable, each
of whom shall have such title, hold office for such period, have such
authority and perform such duties as the Board of Directors may determine.
The Board of Directors from time to time may delegate to one or more officers
or agents the power to appoint any such subordinate officers or agents and to
prescribe their respective rights, terms of office, authorities, and duties.
Any officer or agent appointed in accordance with the provisions of this
Section 5.11 may be removed, either with or without cause, by any officer upon
whom such power of removal shall have been conferred by the Board of
Directors. [MGCL, Section 2-412(b)]
Section 5.12.Remuneration: The salaries or other compensation of the
officers of the Corporation shall be fixed from time to time by resolution of
the Board of Directors, except that the Board of Directors may by resolution
delegate to any person or group of persons the power to fix the salaries or
other compensation of any subordinate officers or agents appointed in
accordance with the provisions of Section 5.11 hereof.
Section 5.13.Surety Bond: The Board of Directors may require any
PAGE 16
officer or agent of the Corporation to execute a bond (including, without
limitation, any bond required by the Investment Company Act and the rules and
regulations of the Securities and Exchange Commission promulgated thereunder)
to the Corporation in such sum and with such surety or sureties as the Board
of Directors may determine, conditioned upon the faithful performance of his
or her duties to the Corporation, including responsibility for negligence and
for the accounting for any of the Corporation's property, funds or securities
that may come into his or her hands.
ARTICLE VI
CUSTODY OF SECURITIES AND CASH
Section 6.01.Employment of a Custodian: The Corporation shall place and
at all times maintain in the custody of a Custodian (including any sub-
custodian for the Custodian) all funds, securities, and similar investments
owned by the Corporation. The Custodian shall be a bank having an aggregate
capital, surplus, and undivided profits of not less than $10,000,000. Subject
to such rules, regulations, and orders as the Securities and Exchange
Commission may adopt as necessary or appropriate for the protection of
investors, the Corporation's Custodian may deposit all or a part of the
securities owned by the Corporation in a sub-custodian or sub-custodians
situated within or without the United States. The Custodian shall be
appointed and its remuneration fixed by the Board of Directors. [Investment
Company Act, Section 17(f)]
Section 6.02.Central Certificate Service: Subject to such rules,
regulations, and orders as the Securities and Exchange Commission may adopt as
necessary or appropriate for the protection of investors, the Corporation's
Custodian may deposit all or any part of the securities owned by the
Corporation in a system for the central handling of securities established by
a national securities exchange or national securities association registered
with the Commission under the Securities Exchange Act of 1934, or such other
person as may be permitted by the Commission, pursuant to which system all
securities of any particular class or series of any issuer deposited within
the system are treated as fungible and may be transferred or pledged by
bookkeeping entry without physical delivery of such securities. [Investment
Company Act, Section 17(f)]
Section 6.03.Cash Assets: The cash proceeds from the sale of securities
and similar investments and other cash assets of the Corporation shall be kept
in the custody of a bank or banks appointed pursuant to Section 6.01 hereof,
or in accordance with such rules and regulations or orders as the Securities
and Exchange Commission may from time to time prescribe for the protection of
investors, except that the Corporation may maintain a checking account or
accounts in a bank or banks, each having an aggregate capital, surplus, and
undivided profits of not less than $10,000,000, provided that the balance of
such account or the aggregate balances of such accounts shall at no time
exceed the amount of the fidelity bond, maintained pursuant to the
requirements of the Investment Company Act and rules and regulations
thereunder, covering the officers or employees authorized to draw on such
account or accounts. [Investment Company Act, Section 17(f)]
PAGE 17
Section 6.04.Free Cash Accounts: The Corporation may, upon resolution
of its Board of Directors, maintain a petty cash account free of the foregoing
requirements of this Article VI in an amount not to exceed $500, provided that
such account is operated under the imprest system and is maintained subject to
adequate controls approved by the Board of Directors over disbursements and
reimbursements including, but not limited to, fidelity bond coverage for
persons having access to such funds. [Investment Company Act, Rule 17f-3]
Section 6.05.Action Upon Termination of Custodian Agreement: Upon
resignation of a custodian of the Corporation or inability of a custodian to
continue to serve, the Board of Directors shall promptly appoint a successor
custodian, but in the event that no successor custodian can be found who has
the required qualifications and is willing to serve, the Board of Directors
shall call as promptly as possible a special meeting of the shareholders to
determine whether the Corporation shall function without a custodian or shall
be liquidated. If so directed by vote of the holders of a majority of the
outstanding shares of stock of the Corporation, the custodian shall deliver
and pay over all property of the Corporation held by it as specified in such
vote.
Section 6.06.Other Arrangements: The Corporation may make such other
arrangements for the custody of its assets (including deposit arrangements) as
may be required by any applicable law, rule or regulation.
ARTICLE VII
EXECUTION OF INSTRUMENTS, VOTING OF SECURITIES
Section 7.01.Execution of Instruments: All deeds, documents, transfers,
contracts, agreements, requisitions or orders, promissory notes, assignments,
endorsements, checks and drafts for the payment of money by the Corporation,
and other instruments requiring execution by the Corporation shall be signed
by the Chairman, the President, a Vice President, or the Treasurer, or as the
Board of Directors may otherwise, from time to time, authorize. Any such
authorization may be general or confined to specific instances.
Section 7.02.Voting of Securities: Unless otherwise ordered by the
Board of Directors, the Chairman, the President, or any Vice President shall
have full power and authority on behalf of the Corporation to attend and to
act and to vote, or in the name of the Corporation to execute proxies to vote,
at any meeting of shareholders of any company in which the Corporation may
hold stock. At any such meeting such officer shall possess and may exercise
(in person or by proxy) any and all rights, powers, and privileges incident to
the ownership of such stock. The Board of Directors may by resolution from
time to time confer like powers upon any other person or persons. [MGCL,
Section 2-509]
PAGE 18
ARTICLE VIII
CAPITAL STOCK
Section 8.01.Ownership of Shares:
(a) Certificates certifying the ownership of shares will not be issued
for shares purchased or otherwise acquired. The ownership of shares, full or
fractional, shall be recorded on the books of the Corporation or its agent.
The record books of the Corporation as kept by the Corporation or its agent,
as the case may be, shall be conclusive as to the number of shares held from
time to time by each such shareholder.
Section 8.02.Transfer of Capital Stock:
(a) Shares of stock of the Corporation shall be transferable only upon
the books of the Corporation kept for such purpose.
(b) The Corporation shall be entitled to treat the holder of record of
any share of stock as the absolute owner thereof for all purposes, and
accordingly shall not be bound to recognize any legal, equitable, or other
claim or interest in such share on the part of any other person, whether or
not it shall have express or other notice thereof, except as otherwise
expressly provided by the statutes of the State of Maryland.
Section 8.03.Transfer Agents and Registrars: The Board of Directors
may, from time to time, appoint or remove transfer agents and registrars of
transfers of shares of stock of the Corporation, and it may appoint the same
person as both transfer agent and registrar.
Section 8.04.Transfer Regulations: The shares of stock of the
Corporation may be freely transferred, and the Board of Directors may, from
time to time, adopt lawful rules and regulations with reference to the method
of transfer of the shares of stock of the Corporation.
Section 8.05.Fixing of Record Date: The Board of Directors may fix in
advance a date as a record date for the determination of the shareholders
entitled to notice of or to vote at any meeting of shareholders or any
adjournment thereof, or to express consent to corporate action in writing
without a meeting, or to receive payment of any dividend or other distribution
or allotment of any rights, or to exercise any rights in respect of any
change, conversion, or exchange of stock, or for any other proper purpose,
provided that such record date shall be a date not more than sixty (60) days
nor, in the case of a meeting of shareholders, less than ten (10) days prior
to the date on which the particular action, requiring such determination of
shareholders, is to be taken. In such case, only such shareholders as shall
be shareholders of record on the record date so fixed shall be entitled to
such notice of, and to vote at, such meeting or adjournment, or to give such
consent, or to receive payment of such dividend or other distribution, or to
receive such allotment of rights, or to exercise such rights, or to take other
action, as the case may be, notwithstanding any transfer of any shares on the
books of the Corporation after any such record date. A meeting of
shareholders convened on the date for which it was called may be adjourned
PAGE 19
from time to time without notice to a date not more than one hundred twenty
(120) days after the original record date. [MGCL, Section 2-511]
ARTICLE IX
FISCAL YEAR, ACCOUNTANT
Section 9.01.Fiscal Year: The fiscal year of the Corporation shall be
the twelve (12) calendar months beginning on the 1st day of November in each
year and ending on the last day of the following October, or such other period
of twelve (12) calendar months as the Board of Directors may by resolution
prescribe.
Section 9.02.Accountant:
(a) The Corporation shall employ an independent public accountant or
firm of independent public accountants for each series of the Corporation to
examine the accounts of the Corporation with respect to such series and to
sign and certify financial statements filed by the Corporation with respect to
such series. The certificates and reports of the accountant(s) shall be
addressed both to the Board of Directors and to the shareholders. The
Corporation may employ a different accountant with respect to each series.
(b) A majority of the members of the Board of Directors who are not
interested persons (as such term is defined in the Investment Company Act) of
the Corporation shall select the accountant for each series, by vote cast in
person, at any meeting held within such period of time as may be allowed under
the Investment Company Act. Such selection shall be submitted for
ratification or rejection at the next succeeding annual shareholders' meeting
for such series. If such meeting shall reject such selection, the accountant
for such series shall be selected by majority vote of the Corporation's
outstanding voting securities of such series, either at the meeting at which
the rejection occurred or at a subsequent meeting of shareholders for such
series called for the purpose.
(c) Any vacancy occurring between annual meetings, due to the death or
resignation of the accountant of a series, may be filled by the vote of a
majority of those members of the Board of Directors who are not interested
persons (as so defined) of the Corporation, cast in person at a meeting called
for the purpose of voting on such action.
(d) The employment of the accountant of a series shall be conditioned
upon the right of such series of the Corporation by vote of a majority of the
outstanding voting securities of such series at any meeting called for the
purpose to terminate such employment forthwith without any penalty.
[Investment Company Act, Section 32(a)]
PAGE 20
ARTICLE X
INDEMNIFICATION AND INSURANCE
Section 10.01.Indemnification and Payment of Expenses in Advance: The
Corporation shall indemnify any individual ("Indemnitee") who is a present or
former director, officer, employee, or agent of the Corporation, or who is or
has been serving at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, who, by reason of his position was, is, or is threatened to
be made a party to any threatened, pending, or completed action, suit, or
proceeding, whether civil, criminal, administrative, or investigative
(hereinafter collectively referred to as a "Proceeding") against any
judgments, penalties, fines, settlements, and reasonable expenses (including
attorneys' fees) incurred by such Indemnitee in connection with any
Proceeding, to the fullest extent that such indemnification may be lawful
under Maryland law. The Corporation shall pay any reasonable expenses so
incurred by such Indemnitee in defending a Proceeding in advance of the final
disposition thereof to the fullest extent that such advance payment may be
lawful under Maryland law. Subject to any applicable limitations and
requirements set forth in the Corporation's Articles of Incorporation and in
these By-Laws, any payment of indemnification or advance of expenses shall be
made in accordance with the procedures set forth in Maryland law.
Notwithstanding the foregoing, nothing herein shall protect or purport
to protect any Indemnitee against any liability to which he would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of his office
("Disabling Conduct").
Anything in this Article X to the contrary notwithstanding, no
indemnification shall be made by the Corporation to any Indemnitee unless:
(a) there is a final decision on the merits by a court or other body
before whom the Proceeding was brought that the Indemnitee was not
liable by reason of Disabling Conduct; or
(b) in the absence of such a decision, there is a reasonable
determination, based upon a review of the facts, that the
Indemnitee was not liable by reason of Disabling Conduct, which
determination shall be made by:
(i) the vote of a majority of a quorum of directors who are
neither "interested persons" of the Corporation as defined in
Section 2(a)(19) of the Investment Company Act, nor parties to
the Proceeding; or
(ii) an independent legal counsel in a written opinion.
Anything in this Article X to the contrary notwithstanding, any advance
of expenses by the Corporation to any Indemnitee shall be made only upon the
undertaking by such Indemnitee to repay the advance unless it is ultimately
determined that such Indemnitee is entitled to indemnification as above
provided, and only if one of the following conditions is met:
PAGE 21
(a) the Indemnitee provides a security for his undertaking; or
(b) the Corporation shall be insured against losses arising by
reason of any lawful advances; or
(c) there is a determination, based on a review of readily
available facts, that there is reason to believe that the
Indemnitee will ultimately be found entitled to
indemnification, which determination shall be made by:
(i) a majority of a quorum of directors who are neither
"interested persons" of the Corporation as defined in Section
2(a)(19) of the Investment Company Act, nor parties to the
Proceeding; or
(ii) an independent legal counsel in a written opinion.
Section 10.02. Insurance of Officers, Directors, Employees and Agents:
To the fullest extent permitted by applicable Maryland law and by Section
17(h) of the Investment Company Act, as from time to time amended, the
Corporation may purchase and maintain insurance on behalf of any person who is
or was a director, officer, employee, or agent of the Corporation, or who is
or was serving at the request of the Corporation as a director, officer,
employee, or agent of another corporation, partnership, joint venture, trust,
or other enterprise, against any liability asserted against him and incurred
by him in or arising out of his position, whether or not the Corporation would
have the power to indemnify him against such liability. [MGCL, Section 2-
418(k)]
Section 10.03.Amendment: No amendment, alteration or repeal of this
Article or the adoption, alteration or amendment of any other provision of the
Articles of Incorporation or By-Laws inconsistent with this Article shall
adversely affect any right or protection of any person under this Article with
respect to any act or failure to act which occurred prior to such amendment,
alteration, repeal or adoption.
ARTICLE XI
AMENDMENTS
Section 11.01.General: Except as provided in Section 11.02 hereof, all
By-Laws of the Corporation, whether adopted by the Board of Directors or the
shareholders, shall be subject to amendment, alteration, or repeal, and new
By-Laws may be made, by the affirmative vote of a majority of either:
(a) the holders of record of the outstanding shares of stock of the
Corporation entitled to vote, at any annual or special meeting the
notice or waiver of notice of which shall have specified or summarized
the proposed amendment, alteration, repeal, or new By-Law; or
(b) the Directors present at any regular or special meeting at
which a quorum is present if the notice or waiver of notice thereof or
PAGE 22
material sent to the Directors in connection therewith on or prior to
the last date for the giving of such notice under these By-Laws shall
have specified or summarized the proposed amendment, alteration, repeal,
or new By-Law.
Section 11.02.By Shareholders Only:
(a) No amendment of any section of these By-Laws shall be made
except by the shareholders of the Corporation if the shareholders shall have
provided in the By-Laws that such section may not be amended, altered, or
repealed except by the shareholders.
(b) From and after the issue of any shares of the Capital Stock
of the Corporation, no amendment of this Article XI shall be made except by
the shareholders of the Corporation.
ARTICLE XII
MISCELLANEOUS
Section 12.01. Use of the Term "Annual Meeting:" The use of the term
"annual meeting" in these By-Laws shall not be construed as implying a
requirement that a shareholder meeting be held annually.
February 4, 1994
T. Rowe Price Equity Series, Inc.
100 East Pratt Street
Baltimore, Maryland 21202
Dear Sirs:
In connection with the proposed registration of an indefinite number of
shares of Capital Stock of your Company, I have examined certified copies of
your Company's Articles of Incorporation dated January 31, 1994, and the By-
Laws of your Company as presently in effect.
I am of the opinion that:
(i) your Company is a corporation duly organized and existing under the
laws of Maryland; and
(ii) each of such authorized shares of Capital Stock of your Company,
upon payment in full of the price fixed by the Board of Directors of
your Company, will be legally and validly issued and will be fully
paid and non-assessable.
I hereby consent to the use of this opinion as an exhibit to the
Company's Registration Statement on Form N-1A to be filed with the Securities
and Exchange Commission for the registration under the Securities Act of 1933
of an indefinite number of shares of Capital Stock of your Company.
Sincerely,
/s/Henry H. Hopkins
Henry H. Hopkins
