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Prospectus for the T. Rowe Price Mid-Cap Growth Portfolio, dated
November 14, 1996, should be inserted here.
Prospectus
T. Rowe Price Mid-Cap Growth Portfolio
Facts at a Glance
Investment Goal
To provide long-term capital appreciation by investing primarily in common
stocks of medium-sized (mid-cap) growth companies. As with any mutual fund,
there is no guarantee the fund will achieve its goal.
Strategy
The fund will focus on companies with superior earnings growth potential that
are no longer considered new or emerging, but are not yet well-established.
Risk/Reward
The potential to provide above-average growth of capital over time. Mid-cap
growth company stocks are generally more volatile than stocks of large,
well-established companies, but they offer the possibility of more rapid
growth. Additionally, mid-cap stocks tend to be less volatile than
small-company stocks. The fund's share price may decline, causing a loss.
Investor Profile
Individuals seeking greater potential for capital appreciation than is
provided by well-established companies, who are willing to incur the higher
risk of loss associated with somewhat aggressive investments in mid-cap
stocks.
Investment Manager
Founded in 1937 by the late Thomas Rowe Price, Jr., T. Rowe Price Associates,
Inc. ("T. Rowe Price") and its affiliates managed over $92 billion for more
than four million individual and institutional investor accounts as of
September 30, 1996.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION, OR ANY STATE SECURITIES COMMISSION, PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
T. Rowe Price Equity Series, Inc.
November 14, 1996
Prospectus
Contents
1 About the Fund
Fund, Market, and Risk Characteristics 2
2 About Your Account
Pricing Shares and Receiving Sale Proceeds 4
Dividends and Distributions 4
3 More About the Fund
Organization and Management 6
Understanding Performance Information 7
Investment Policies and Practices 8
This prospectus contains information that a prospective Contract Holder or
Participant should know about the fund before investing. Please keep it for
future reference. A Statement of Additional Information about the fund, dated
November 14, 1996, has been filed with the Securities and Exchange Commission
and is incorporated by reference in this prospectus. To obtain a free copy,
contact your insurance company.
Invest With Confidence(registered trademark)
T. Rowe Price
1 About the Fund
Fund, Market, and Risk Characteristics: What to Expect
To help you decide whether this fund is appropriate for you, this section
takes a closer look at its investment objective and approach.
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THE FUND SHOULD NOT REPRESENT YOUR COMPLETE INVESTMENT PROGRAM NOR BE USED FOR
SHORT-TERM TRADING PURPOSES.
What is the fund's objective?
The fund's investment objective is to provide long-term capital appreciation
by investing in mid-cap stocks offering the potential for above-average
earnings growth.
What is the fund's investment program?
The fund will invest at least 65% of its assets in a diversified portfolio of
mid-cap companies whose earnings are expected by T. Rowe Price to grow at a
faster rate than the average company.
Most of the assets will be invested in U.S. common stocks. However, the fund
may also purchase other types of securities, for example, foreign securities,
convertible securities, and warrants, when considered consistent with the
fund's investment objective and program. The fund may also engage in a variety
of investment management practices, such as buying and selling futures and
options. (Please see "Investment Policies and Practices" for further details
about the fund's investments.)
What are "mid-cap growth" stocks?
A mid-cap company is defined as one whose market capitalization (number of
shares outstanding multiplied by share price) falls within the capitalization
range of companies included in the Standard & Poor's 400 Mid-Cap Index --
generally, between $300 million and $4 billion. Mid-cap growth companies are
often in the early, more dynamic phase of their life cycles, but are no longer
considered new or emerging. By focusing their activities, mid-cap companies
may be more responsive and better able to adapt to the changing needs of their
markets than large companies. Mid-cap companies tend to offer higher growth
prospects than larger companies. They tend to have greater resources, and
therefore represent less risk, than smaller companies. They are usually mature
enough to have established organizational structures and the depth of
management needed to expand their operations. In addition, these companies
generally have sufficient financial resources and access to capital to finance
their growth.
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GROWTH INVESTORS LOOK FOR COMPANIES WITH ABOVE-AVERAGE EARNINGS GAINS.
What is meant by a "growth" investment approach?
More than 50 years ago, Thomas Rowe Price pioneered the growth stock theory of
investing. It is based on the premise that inflation represents a more serious
long-term threat to an investor's portfolio than stock market fluctuations or
recessions. Mr. Price believed that when a company's earnings grow faster than
both inflation and the economy in general, the market will eventually reward
its long-term earnings growth with a higher stock price. In addition, the
company should be able to raise its dividend in line with its growth in
earnings. However, investors should be aware that, during periods of adverse
economic and market conditions, stock prices may fall despite favorable
earnings trends.
How does the fund select mid-cap stocks for the portfolio?
T. Rowe Price analysts seek to identify mid-cap companies with attractive
growth prospects. The fund attempts to invest primarily in companies that
offer proven products or services; have a historical record of above-average
earnings growth; demonstrate the potential to sustain earnings growth; operate
in industries experiencing increasing demand; or are believed to be
undervalued in the marketplace.
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THE FUND'S SHARE PRICE WILL FLUCTUATE; WHEN YOU SELL YOUR SHARES, YOU MAY LOSE
MONEY.
What are some of the fund's potential risks?
The stocks of mid-cap companies entail greater risk and are usually more
volatile than the shares of large, established companies. Also, growth stocks
can be volatile for several reasons. Since they usually reinvest a high
portion of earnings in their own businesses, they may lack the comfortable
dividend yield associated with value stocks that can cushion total return in a
declining market. Also, since investors buy these stocks because of their
expected superior earnings growth, earnings disappointments often result in
sharp price declines.
What are some of the fund's potential rewards?
Mid-cap companies may offer greater potential for capital appreciation than
large, well-established companies because of their higher growth rates. Since
mid-cap stocks are usually less actively followed by securities analysts, they
could be undervalued by the market, providing opportunities for investors.
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EQUITY INVESTORS SHOULD HAVE A LONG-TERM INVESTMENT HORIZON AND BE WILLING TO
WAIT OUT BEAR MARKETS.
What are some potential risks and rewards of investing in the stock market?
Common stocks in general offer a way to invest for long-term growth of
capital. As the U.S. economy has expanded, corporate profits have grown and
share prices have risen. However, economic growth has been punctuated by
periodic declines that can negatively affect corporate earnings and stock
prices. Share prices of even the best managed, most profitable corporations
can decline for reasons unrelated to their performance, such as swings in
investor psychology or anticipated changes in interest rates. In addition,
significant trading by large institutional investors can result in price
fluctuations.
How can I decide if the fund is appropriate for me?
Consider your investment goals, your time horizon for achieving them, and your
tolerance level for risk. If you can accept the greater risk of investing in
mid-cap companies in an effort to achieve superior capital appreciation, the
fund can be an appropriate part of your overall investment strategy.
Is there other information I need to review before making a decision?
Be sure to review "Investment Policies and Practices" in Section 3, which
discusses the following: Types of Portfolio Securities (common and preferred
stocks, convertible securities and warrants, foreign securities, hybrid
instruments, and private placements); and Types of Management Practices (cash
position, borrowing money and transferring assets, futures and options,
managing foreign currency risk, lending of portfolio securities, and portfolio
turnover).
2 About Your Account
Pricing Shares and Receiving Sale Proceeds
Here are some procedures you should know when investing in the fund. For
instructions on how to purchase and redeem shares of the fund, read the
separate account prospectus.
Shares of the fund may be offered to insurance company separate accounts
established for the purpose of funding variable annuity contracts. They may
also be offered to insurance company separate accounts established for the
purpose of funding variable life contracts. Variable annuity and variable life
Contract Holders or Participants are not the shareholders of the fund. Rather,
the separate account is the shareholder. The variable annuity and variable
life contracts are described in separate prospectuses issued by the insurance
companies. The fund assumes no responsibility for such prospectuses, or
variable annuity or life contracts.
Shares of the fund are sold and redeemed without the imposition of any sales
commission or redemption charge. However, certain other charges may apply to
annuity or life contracts. Those charges are disclosed in the separate account
prospectus.
How and when shares are priced
The share price (also called "net asset value" or NAV per share) for the fund
is calculated at 4 p.m. ET each day the New York Stock Exchange is open for
business. To calculate the NAV, the fund's assets are valued and totaled,
liabilities are subtracted, and the balance, called net assets, is divided by
the number of shares outstanding.
How your purchase, sale, or exchange price is determined
Purchases. The insurance companies purchase shares of the fund for separate
accounts, using premiums allocated by the Contract Holders or Participants.
Shares are purchased at the NAV next determined after the insurance company
receives the premium payment in acceptable form. Initial and subsequent
payments allocated to the fund are subject to the limits stated in the
separate account prospectus issued by the insurance company.
Redemptions. The insurance companies redeem shares of the fund to make benefit
or surrender payments under the terms of its Contracts. Redemptions are
processed on any day on which the New York Stock Exchange is open and are
priced at the fund's NAV next determined after the insurance company receives
a surrender request in acceptable form.
Note: The time at which transactions and shares are priced and the time until
which orders are accepted may be changed in case of an emergency or if the New
York Stock Exchange closes at a time other than 4 p.m. ET.
How you can receive the proceeds from a sale
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.
Dividends and Distributions
For a discussion of the tax status of your variable annuity contract, please
refer to the prospectus of your insurance company's separate account.
Dividends and other distributions. The policy of the fund is to distribute all
of its net investment income and net capital gains each year to its
shareholders, which are the separate accounts established by the various
insurance companies in connection with their issuance of variable annuity and
life contracts. Dividends from net investment income are declared and paid
annually. All fund distributions made to a separate account will be reinvested
automatically in additional fund shares, unless a shareholder (separate
account) elects to receive distributions in cash. Under current law, dividends
and distributions made by the fund to separate accounts, generally, are not
taxable to the separate accounts, the insurance company or the Contract
Holder, provided that the separate account meets the diversification
requirements of Section 817(h) of the Internal Revenue Code of 1986, as
amended, and other tax-related requirements are satisfied. The fund intends to
diversify its investments in the manner required under Code Section 817(h).
Foreign Transactions. If the fund pays nonrefundable taxes to foreign
governments during the year, the taxes will reduce the fund's dividends.
3 More About the Fund
Organization and Management
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SHAREHOLDERS BENEFIT FROM T. ROWE PRICE'S 59 YEARS OF INVESTMENT MANAGEMENT
EXPERIENCE.
How is the fund organized?
The T. Rowe Price Equity Series, Inc. (the "Corporation") was incorporated in
Maryland in 1994, and is a "diversified, open-end investment company," or
mutual fund. Mutual funds pool money received from shareholders and invest it
to try to achieve specific objectives. Currently, the corporation consists of
four series, each representing a separate class of shares having different
objectives and investment policies. The four series are: the Equity Income
Portfolio, the New America Growth Portfolio, and the Personal Strategy
Balanced Portfolio, which were all established in 1994; and the Mid-Cap Growth
Portfolio, established in 1996. The other three portfolios are described in
separate prospectuses. 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.
What is meant by "shares"?
As with all mutual funds, investors purchase shares when they put money in a
fund. These shares are part of a fund's authorized capital stock, but share
certificates are not issued.
Each share and fractional share entitles the shareholder to:
o Receive a proportional interest in a fund's income and capital gain
distributions.
o Cast one vote per share on certain fund matters, including the election
of fund directors, changes in fundamental policies, or approval of
changes in the fund's management contract.
The shares of the fund have equal voting rights. The various insurance
companies own the outstanding shares of the fund in their separate accounts.
These separate accounts are registered under the 1940 Act or are excluded from
registration thereunder. Under current law, the insurance companies must vote
the shares held in registered separate accounts in accordance with voting
instructions received from variable Contract Holders or Participants having
the right to give such instructions.
Do T. Rowe Price funds have annual shareholder meetings?
The funds are not required to hold annual meetings and, in order to avoid
unnecessary costs to fund shareholders, do not intend to do so except when
certain matters, such as a change in a fund's fundamental policies, are to be
decided. In addition, shareholders representing at least 10% of all eligible
votes may call a special meeting if they wish for the purpose of voting on the
removal of any fund director or trustee. If a meeting is held and you cannot
attend, you can vote by proxy. Before the meeting, the fund will send you
proxy materials that explain the issues to be decided and include a voting
card for you to mail back.
Who runs the fund?
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ALL DECISIONS REGARDING THE PURCHASE AND SALE OF FUND INVESTMENTS ARE MADE BY
T. ROWE PRICE - SPECIFICALLY BY THE FUND'S PORTFOLIO MANAGERS.
General Oversight. The Corporation is governed by a Board of Directors that
meets regularly to review the funds' investments, performance, expenses, and
other business affairs. The Board elects the funds' officers. The policy of
the funds is that a majority of Board members will be independent of T. Rowe
Price.
Portfolio Management. The fund has an Investment Advisory Committee composed
of the following members: Brian W. H. Berghuis, Chairman, Marc L. Baylin,
James A. C. Kennedy, and John F. Wakeman. The committee chairman has
day-to-day responsibility for managing the portfolio and works with the
committee in developing and executing the fund's investment program. Mr.
Berghuis has been chairman of the fund's committee since its inception in
1996. Mr. Berghuis has been managing investments since joining T. Rowe Price
in 1985.
Marketing. T. Rowe Price Investment Services, Inc., a wholly owned subsidiary
of T. Rowe Price, distributes (sells) shares of this and all other T. Rowe
Price funds.
Shareholder Services. T. Rowe Price Services, Inc., another wholly owned
subsidiary, acts as the fund's transfer and dividend disbursing agent and
provides shareholder and administrative services. T. Rowe Price calculates the
daily share price and maintains the portfolio and general accounting records
of the fund. The address for T. Rowe Price Services is 100 East Pratt St.,
Baltimore, MD 21202.
How are fund expenses determined?
Under the management agreement, all expenses of the fund will be paid by T.
Rowe Price, except interest, taxes, brokerage commissions, directors' fees and
expenses (including counsel fees and expenses), and extraordinary expenses.
The Board of Directors of the fund reserves the right to impose additional
fees against shareholder accounts to defray expenses which would otherwise be
paid by T. Rowe Price under the management agreement. The Board does not
anticipate levying such charges; such a fee, if charged, may be retained by
the fund or paid to T. Rowe Price.
The Management Fee. The fund pays T. Rowe Price an annual all-inclusive fee of
0.85% based on its average daily net assets. The fund calculates and accrues
the fee daily. This fee pays for investment management services and other
operating costs.
Variable Annuity and Variable Life Charges. Variable annuity and variable life
fees and charges are in addition to those described previously and are
described in variable annuity and life prospectuses.
The fund may serve as an investment medium for both variable annuity contracts
and variable life insurance policies. Shares of the fund may be offered to
separate accounts established by any number of insurance companies. The fund
currently does not foresee any disadvantages to variable annuity contract
owners due to the fact that the fund may serve as an investment medium for
both variable life insurance policies and annuity contracts; however, due to
differences in tax treatment or other considerations, it is theoretically
possible that the interests of owners of annuity contracts and insurance
policies for which the fund serves as an investment medium might at some time
be in conflict. However, the Corporation's Board of Directors is required to
monitor events to identify any material conflicts between variable annuity
contract owners and variable life policy owners, and will determine what
action, if any, should be taken in the event of such a conflict. If such a
conflict were to occur, an insurance company participating in the fund might
be required to redeem the investment of one or more of its separate accounts
from the fund. This might force the fund to sell securities at disadvantageous
prices.
Understanding Performance Information
This section should help you understand the terms used to describe fund
performance. You will come across them in shareholder reports you receive from
us.
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TOTAL RETURN IS THE MOST WIDELY USED PERFORMANCE MEASURE. DETAILED PERFORMANCE
INFORMATION IS INCLUDED IN THE FUND'S ANNUAL AND SEMIANNUAL SHAREHOLDER
REPORTS, WHICH ARE AVAILABLE WITHOUT CHARGE.
Total Return
This tells you how much an investment in a fund has changed in value over a
given time period. It reflects any net increase or decrease in the share price
and assumes that all dividends and capital gains (if any) paid during the
period were reinvested in additional shares. Including reinvested
distributions means that total return numbers include the effect of
compounding, i.e., you receive income and capital gain distributions on a
rising number of shares.
Advertisements for a fund may include cumulative or compound average annual
total return figures, which may be compared with various indices, other
performance measures, or other mutual funds.
Cumulative Total Return
This is the actual rate of return on an investment for a specified period. A
cumulative return does not indicate how much the value of the investment may
have fluctuated between the beginning and the end of the period specified.
Average Annual Total Return
This is always hypothetical. Working backward from the actual cumulative
return, it tells you what constant year-by-year return would have produced the
actual cumulative return. By smoothing out all the variations in annual
performance, it gives you an idea of the investment's annual contribution to
your portfolio provided you held it for the entire period in question.
Total returns quoted for the fund include the effect of deducting the fund's
expenses, but may not include charges and expenses attributable to any
particular insurance product. Since you can only purchase shares of the fund
through an insurance product, you should carefully review the prospectus of
the insurance product you have chosen for information on relevant charges and
expenses. Excluding these charges from quotations of the fund's performance
has the effect of increasing the performance quoted.
Investment Policies and Practices
This section takes a detailed look at some of the types of securities the fund
may hold in its portfolio and the various kinds of investment practices that
may be used in day-to-day portfolio management. The fund's investment program
is subject to further restrictions and risks described in the Statement of
Additional Information.
Shareholder approval is required to substantively change the fund's objective
and certain investment restrictions noted in the following section as
"fundamental policies." The managers also follow certain "operating policies"
which can be changed without shareholder approval. However, significant
changes are discussed with shareholders in fund reports. The fund adheres to
applicable investment restrictions and policies at the time it makes an
investment. A later change in circumstances will not require the sale of an
investment if it was proper at the time it was made.
The fund's holdings of certain kinds of investments cannot exceed maximum
percentages of total assets, which are set forth herein. For instance, this
fund is not permitted to invest more than 10% of total assets in hybrid
instruments. While these restrictions provide a useful level of detail about
the fund's investment program, investors should not view them as an accurate
gauge of the potential risk of such investments. For example, in a given
period, a 5% investment in hybrid instruments could have significantly more of
an impact on the fund's share price than its weighting in the portfolio. The
net effect of a particular investment depends on its volatility and the size
of its overall return in relation to the performance of all the fund's other
investments.
Changes in the fund's holdings, the fund's performance, and the contribution
of various investments are discussed in the shareholder reports sent to you.
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FUND MANAGERS HAVE CONSIDERABLE LEEWAY IN CHOOSING INVESTMENT STRATEGIES AND
SELECTING SECURITIES THEY BELIEVE WILL HELP THE FUND ACHIEVE ITS OBJECTIVE.
Types of Portfolio Securities
In seeking to meet its investment objective, the fund may invest in any type
of security or instrument (including certain potentially high-risk
derivatives) whose investment characteristics are consistent with the fund's
investment program. The following pages describe the principal types of
portfolio securities and investment management practices of the fund.
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 a single issuer or more than 10% of the
voting securities of the issuer would be held by the fund.
Common and Preferred Stocks. Stocks represent shares of ownership in a
company. Generally, preferred stock has a specified dividend and ranks after
bonds and before common stocks in its claim on income for dividend payments
and on assets should the company be liquidated. After other claims are
satisfied, common stockholders participate in company profits on a pro rata
basis; profits may be paid out in dividends or reinvested in the company to
help it grow. Increases and decreases in earnings are usually reflected in a
company's stock price, so common stocks generally have the greatest
appreciation and depreciation potential of all corporate securities. While
most preferred stocks pay a dividend, the fund may purchase preferred stock
where the issuer has omitted, or is in danger of omitting, payment of its
dividend. Such investments would be made primarily for their capital
appreciation potential.
Convertible Securities and Warrants. The fund may invest in debt or preferred
equity securities convertible into or exchangeable for equity securities.
Traditionally, convertible securities have paid dividends or interest at rates
higher than common stocks but lower than nonconvertible securities. They
generally participate in the appreciation or depreciation of the underlying
stock into which they are convertible, but to a lesser degree. In recent
years, convertibles have been developed which combine higher or lower current
income with options and other features. Warrants are options to buy a stated
number of shares of common stock at a specified price anytime during the life
of the warrants (generally, two or more years).
Foreign Securities. The fund may invest in foreign securities. These include
nondollar-denominated securities traded outside of the U.S. and
dollar-denominated securities of foreign issuers traded in the U.S. (such as
ADRs). Such investments increase a portfolio's diversification and may enhance
return, but they also involve some special risks such as exposure to
potentially adverse local political and economic developments; nationalization
and exchange controls; potentially lower liquidity and higher volatility;
possible problems arising from accounting, disclosure, settlement, and
regulatory practices that differ from U.S. standards; and the chance that
fluctuations in foreign exchange rates will decrease the investment's value
(favorable changes can increase its value). These risks are heightened for
investments in developing countries and there is no limit on the amount of the
fund's foreign investments which may be made in such countries.
Operating policy: The fund may invest up to 25% of its total assets (excluding
reserves) in foreign securities.
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HYBRIDS CAN HAVE VOLATILE PRICES AND LIMITED LIQUIDITY AND THEIR USE BY THE
FUND MAY NOT BE SUCCESSFUL.
Hybrid Instruments. These instruments (a type of potentially high-risk
derivative) 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.
Operating policy: The fund may invest up to 10% of its total assets in hybrid
instruments.
Private Placements. 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, others may be illiquid and their
sale may involve substantial delays and additional costs.
Operating policy: The fund will not invest more than 15% of its net assets in
illiquid securities. As part of this limit, the fund will not invest more than
10% in restricted securities, provided that securities eligible for resale
under Rule 144A are not subject to the 10% limit.
Types of Management Practices
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CASH RESERVES PROVIDE FLEXIBILITY AND SERVE AS A SHORT-TERM DEFENSE DURING
PERIODS OF UNUSUAL MARKET VOLATILITY.
Cash Position. The fund will hold a certain portion of its assets in U.S. and
foreign dollar-denominated money market securities, including repurchase
agreements, in the two highest rating categories, maturing in one year or
less. For temporary, defensive purposes, the fund may invest without
limitation in such securities. This reserve position provides flexibility in
meeting redemptions, expenses, and the timing of new investments and serves as
a short-term defense during periods of unusual market volatility.
Borrowing Money and Transferring Assets. The fund can borrow money from banks
as a temporary measure for emergency purposes, to facilitate redemption
requests, or for other purposes consistent with the fund's investment
objective and program. Such borrowings may be collateralized with fund assets,
subject to restrictions.
Fundamental policy: Borrowings may not exceed 33 1/3% of total fund assets.
Operating policies: The fund may not transfer as collateral any portfolio
securities except as necessary in connection with permissible borrowings or
investments, and then such transfers may not exceed 33 1/3% of the fund's
total assets. The fund may not purchase additional securities when borrowings
exceed 5% of total assets.
In accordance with California law, the fund may not borrow more than 10% of
its net asset value when borrowing for any general purposes; and the fund may
not borrow more than 25% of net asset value when borrowing as a temporary
measure to facilitate redemptions. Net asset value of a portfolio is the
market value of all investments or assets owned less outstanding liabilities
of the portfolio at the time that any new or additional borrowing is
undertaken.
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FUTURES ARE USED TO MANAGE RISK; OPTIONS GIVE THE INVESTOR THE OPTION TO BUY
OR SELL AN ASSET AT A PREDETERMINED PRICE IN THE FUTURE.
Futures and Options. Futures (a type of potentially high-risk derivative) are
often used to manage or hedge risk, because they enable the investor to buy or
sell an asset in the future at an agreed upon price. Options (another type of
potentially high-risk derivative) 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 and options contracts for any number of
reasons, including: to manage its exposure to changes in securities prices and
foreign currencies; as an efficient means of adjusting its overall exposure to
certain markets; in an effort to enhance income; and to protect the value of
portfolio securities. 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
exposure to such contracts.
Operating policies: Futures: Initial margin deposits and premiums on options
used for non-hedging purposes will not equal more than 5% of the fund's net
asset value. Options on securities: The total market value of securities
against which the fund has written call or put options may not exceed 25% of
its total assets. The fund will not commit more than 5% of its total assets to
premiums when purchasing call or put options.
Managing Foreign Currency Risk. Investors in foreign securities may "hedge"
their exposure to potentially unfavorable currency changes by purchasing a
contract to exchange one currency for another on some future date at a
specified exchange rate. In certain circumstances, a "proxy currency" may be
substituted for the currency in which the investment is denominated, a
strategy known as "proxy hedging." Although foreign currency transactions will
be used primarily to protect a fund's foreign securities from adverse currency
movements relative to the dollar, they involve the risk that anticipated
currency movements will not occur and a 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
total fund assets.
Portfolio Turnover. The fund will not generally trade in securities for
short-term profits, but, when circumstances warrant, securities may be
purchased and sold without regard to the length of time held. A high turnover
rate may increase transaction costs and result in additional taxable gains.
The fund's portfolio turnover rate for its initial period of operations is not
expected to exceed 100%.
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DESCRIPTION OF SIGNIFICANT DIFFERENCES BETWEEN EDGAR FILING AND PRINTED COPY
Information appearing in all capital letters before a paragraph in the Edgar
filing will appear, in the printed copy, as call-outs in the left margin.
PAGE 2
STATEMENT OF ADDITIONAL INFORMATION
T. Rowe Price Equity Series, Inc. (the "Corporation")
T. Rowe Price Mid-Cap Growth Portfolio
(the "Fund")
Shares of the Fund may be offered to insurance company separate
accounts established for the purpose of funding variable annuity
contracts. They may also be offered to insurance company separate
accounts established for the purpose of funding variable life
contracts. Variable annuity and variable life Contract Holders
or Participants are not the shareholders of the Fund. Rather,
the separate account is the shareholder. The variable annuity
and variable life contracts are described in separate
prospectuses issued by the insurance companies. The Fund assumes
no responsibility for such prospectuses, or variable annuity or
life contracts.
In the future, it is possible that the Fund may offer its shares
to separate accounts funding variable annuities, variable life
insurance or other insurance products of other insurance
companies.
This Statement of Additional Information is not a prospectus but
should be read in conjunction with the Fund's prospectus dated
November 14, 1996, 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 November
14, 1996.
PAGE 3
TABLE OF CONTENTS
Page Page
Capital Stock . . . . . . 43 Investment Program . . . . 6
Code of Ethics . . . . . 32 Investment Restrictions . 23
Custodian . . . . . . . . 32 Legal Counsel . . . . . . 44
Dealer Options . . . . . 14 Lending of Portfolio
Distributor for Fund . . 31 Securities . . . . . . . . 8
Dividends . . . . . . . . 38 Management of Fund . . . 27
Federal and State Net Asset Value Per Share 37
Registration of Shares . 44 Options . . . . . . . . . . 9
Foreign Currency Portfolio Management
Transactions . . . . . . 21 Practices . . . . . . . . 8
Futures Contracts . . . . 14 Portfolio Transactions . 32
Hybrid Instruments . . . 6 Pricing of Securities . . 37
Illiquid or Restricted Principal Holders of
Securities . . . . . . . 7 Securities . . . . . . . 30
Independent Accountants . 44 Repurchase Agreements . . . 8
Investment Management Risk Factors of Foreign
Services . . . . . . . . 30 Investing . . . . . . . . 3
Investment Objective and Tax Status . . . . . . . 38
Policies . . . . . . . . 2 Warrants . . . . . . . . . 8
Investment Performance . 39
INVESTMENT OBJECTIVE AND POLICIES
The following information supplements the discussion of the
Fund's investment objective and policies discussed in the Fund's
prospectus. Unless otherwise specified, the investment program
and restrictions of the Fund are not fundamental policies. The
operating policies of the Fund are subject to change by its Board
of Directors without shareholder approval. However, shareholders
will be notified of a material change in an operating policy.
The fundamental policies of the Fund may not be changed without
the approval of at least a majority of the outstanding shares of
the Fund or, if it is less, 67% of the shares represented at a
meeting of shareholders at which the holders of 50% or more of
the shares are represented.
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.
PAGE 4
Special Risks of High-Yield Investing
The Fund may invest 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 leveraged 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.
Risk Factors of Foreign Investing
There are special risks in foreign investing. Certain of
these risks are inherent in any mutual fund while others relate
more to the countries in which the Funds will invest. Many of
the risks are more pronounced for investments in developing or
emerging countries, such as many of the countries of Southeast
Asia, Latin America, Eastern Europe and the Middle East.
Although there is no universally accepted definition, a
developing country is generally considered to be a country which
is in the initial stages of its industrialization cycle with a
per capita gross national product of less than $8,000.
Political and Economic Factors. Individual foreign
economies of certain countries may differ favorably or
unfavorably from the United States' economy in such respects as
growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments
position. The internal politics of certain foreign countries are
not as stable as in the United States. For example, in 1991, the
existing government in Thailand was overthrown in a military
coup. In 1992, there were two military coup attempts in
Venezuela and in 1992 the President of Brazil was impeached. In
addition, significant external political risks currently affect
some foreign countries. Both Taiwan and China still claim
sovereignty of one another and there is a demilitarized border
between North and South Korea.
Governments in certain foreign countries continue to
participate to a significant degree, through ownership interest
or regulation, in their respective economies. Action by these
governments could have a significant effect on market prices of
securities and payment of dividends. The economies of many
foreign countries are heavily dependent upon international trade
and are accordingly affected by protective trade barriers and
economic conditions of their trading partners. The enactment by
these trading partners of protectionist trade legislation could
have a significant adverse effect upon the securities markets of
such countries.
Currency Fluctuations. The Funds will invest in securities
denominated in various currencies. Accordingly, a change in the
value of any such currency against the U.S. dollar will result in
a corresponding change in the U.S. dollar value of the Funds'
assets denominated in that currency. Such
PAGE 5
changes will also affect the Funds' income. Generally, when a
given currency appreciates against the dollar (the dollar
weakens) the value of the Fund's securities denominated in that
currency will rise. When a given currency depreciates against
the dollar (the dollar strengthens) the value of the Funds'
securities denominated in that currency would be expected to
decline.
Investment and Repatriation Restrictions. Foreign
investment in the securities markets of certain foreign countries
is restricted or controlled in varying degrees. These
restrictions may limit at times and preclude investment in
certain of such countries and may increase the cost and expenses
of the Funds. Investments by foreign investors are subject to a
variety of restrictions in many developing countries. These
restrictions may take the form of prior governmental approval,
limits on the amount or type of securities held by foreigners,
and limits on the types of companies in which foreigners may
invest. Additional or different restrictions may be imposed at
any time by these or other countries in which the Funds invest.
In addition, the repatriation of both investment income and
capital from several foreign countries is restricted and
controlled under certain regulations, including in some cases the
need for certain government consents. For example, capital
invested in Chile normally cannot be repatriated for one year.
Market Characteristics. Foreign stock and bond markets are
generally not as developed or efficient as, and may be more
volatile than, those in the United States. While growing in
volume, they usually have substantially less volume than U.S.
markets and the Funds' portfolio securities may be less liquid
and subject to more rapid and erratic price movements than
securities of comparable U.S. companies. Equity securities may
trade at price/earnings multiples higher than comparable United
States securities and such levels may not be sustainable. Fixed
commissions on foreign stock exchanges are generally higher than
negotiated commissions on United States exchanges, although the
Funds will endeavor to achieve the most favorable net results on
their portfolio transactions. There is generally less government
supervision and regulation of foreign stock exchanges, brokers
and listed companies than in the United States. Moreover,
settlement practices for transactions in foreign markets may
differ from those in United States markets. Such differences may
include delays beyond periods customary in the United States and
practices, such as delivery of securities prior to receipt of
payment, which increase the likelihood of a "failed settlement."
Failed settlements can result in losses to a Fund.
Investment Funds. The Fund may invest in investment funds
which have been authorized by the governments of certain
countries specifically to permit foreign investment in securities
of companies listed and traded on the stock exchanges in these
respective countries. The Fund's investment in these funds is
subject to the provisions of the 1940 Act discussed on page 27.
If the Fund invests in such investment funds, the Fund's
shareholders will bear not only its proportionate share of the
expenses of the Fund (including operating expenses and the fees
of the investment manager), but also will bear indirectly similar
expenses of the underlying investment funds. In addition, the
securities of these investment funds may trade at a premium over
their net asset value.
Information and Supervision. There is generally less
publicly available information about foreign companies comparable
to reports and ratings that are published about companies in the
United States. Foreign companies are also generally not subject
to uniform accounting, auditing and financial reporting
standards, practices and requirements comparable to those
applicable to United States companies. It also may be more
difficult to keep currently informed of corporate actions which
affect the prices of portfolio securities.
PAGE 6
Taxes. The dividends and interest payable on certain of
the Funds' foreign portfolio securities may be subject to foreign
withholding taxes, thus reducing the net amount of income
available for distribution to the Funds' shareholders. A
shareholder otherwise subject to United States federal income
taxes may, subject to certain limitations, be entitled to claim a
credit or deduction for U.S. federal income tax purposes for his
or her proportionate share of such foreign taxes paid by the
Funds. (See "Tax Status".)
Other. With respect to certain foreign countries,
especially developing and emerging ones, there is the possibility
of adverse changes in investment or exchange control regulations,
expropriation or confiscatory taxation, limitations on the
removal of funds or other assets of the Funds, political or
social instability, or diplomatic developments which could affect
investments by U.S. persons in those countries.
Eastern Europe and Russia. Changes occurring in Eastern
Europe and Russia today could have long-term potential
consequences. As restrictions fall, this could result in rising
standards of living, lower manufacturing costs, growing consumer
spending, and substantial economic growth. However, investment
in the countries of Eastern Europe and Russia is highly
speculative at this time. Political and economic reforms are too
recent to establish a definite trend away from centrally-planned
economies and state owned industries. In many of the countries
of Eastern Europe and Russia, there is no stock exchange or
formal market for securities. Such countries may also have
government exchange controls, currencies with no recognizable
market value relative to the established currencies of western
market economies, little or no experience in trading in
securities, no financial reporting standards, a lack of a banking
and securities infrastructure to handle such trading, and a legal
tradition which does not recognize rights in private property.
In addition, these countries may have national policies which
restrict investments in companies deemed sensitive to the
country's national interest. Further, the governments in such
countries may require governmental or quasi-governmental
authorities to act as custodian of a Fund's assets invested in
such countries and these authorities may not qualify as a foreign
custodian under the Investment Company Act of 1940 and exemptive
relief from such Act may be required. All of these
considerations are among the factors which could cause
significant risks and uncertainties to investment in Eastern
Europe and Russia. Each Fund will only invest in a company
located in, or a government of, Eastern Europe and Russia, if it
believes the potential return justifies the risk. To the extent
any securities issued by companies in Eastern Europe and Russia
are considered illiquid, each Fund will be required to include
such securities within its 15% restriction on investing in
illiquid securities.
Latin America
To the extent the fund invests in Latin America, such
investments will be subject to the factors discussed below.
Inflation. Most Latin American countries have experienced,
at one time or another, severe and persistent levels of
inflation, including, in some cases, hyperinflation. This has,
in turn, led to high interest rates, extreme measures by
governments to keep inflation in check and a generally
debilitating effect on economic growth. Although inflation in
many countries has lessened, there is no guarantee it will remain
at lower levels.
Political Instability. The political history of certain
Latin American countries has been characterized by political
uncertainty, intervention by the military in civilian and
economic spheres, and political corruption. Such developments,
if they were to reoccur, could reverse favorable trends toward
PAGE 7
market and economic reform, privatization and removal of trade
barriers and result in significant disruption in securities
markets.
Foreign Currency. Certain Latin American countries may
have managed currencies which are maintained at artificial levels
to the U.S. dollar rather than at levels determined by the
market. This type of system can lead to sudden and large
adjustments in the currency which, in turn, can have a disruptive
and negative effect on foreign investors. For example, in late
1994 the value of the Mexican peso lost more than one-third of
its value relative to the dollar. Certain Latin American
countries also may restrict the free conversion of their currency
into foreign currencies, including the U.S. dollar. There is no
significant foreign exchange market for certain currencies and it
would, as a result, be difficult for the Fund to engage in
foreign currency transactions designed to protect the value of
the Fund's interests in securities denominated in such
currencies.
Sovereign Debt. A number of Latin American countries are
among the largest debtors of developing countries. There have
been moratoria on, and reschedulings of, repayment with respect
to these debts. Such events can restrict the flexibility of
these debtor nations in the international markets and result in
the imposition of onerous conditions on their economies.
INVESTMENT PROGRAM
In addition to the investments described in the Fund's
prospectus, the Fund may invest in the following:
Types of Securities
Hybrid Instruments
Hybrid Instruments (a type of potentially high-risk
derivative) 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
PAGE 8
("CFTC"), which generally regulates the trading of commodity
futures by U.S. persons, the SEC, which regulates the offer and
sale of securities by and to U.S. persons, or any other
governmental regulatory authority.
Illiquid or Restricted Securities
Restricted securities may be sold only in privately
negotiated transactions or in a public offering with respect to
which a registration statement is in effect under the Securities
Act of 1933 (the "1933 Act"). Where registration is required,
the Fund may be obligated to pay all or part of the registration
expenses and a considerable period may elapse between the time of
the decision to sell and the time the Fund may be permitted to
sell a security under an effective registration statement. If,
during such a period, adverse market conditions were to develop,
the Fund might obtain a less favorable price than prevailed when
it decided to sell. Restricted securities will be priced at fair
value as determined in accordance with procedures prescribed by
the Fund's Board of Directors. If through the appreciation of
illiquid securities or the depreciation of liquid securities, the
Fund should be in a position where more than 15% of the value of
its net assets are invested in illiquid assets, including
restricted securities, the Fund will take appropriate steps to
protect liquidity.
Notwithstanding the above, the Fund may purchase securities
which, while privately placed, are eligible for purchase and sale
under Rule 144A under the 1933 Act. This rule permits certain
qualified institutional buyers, such as the Fund, to trade in
privately placed securities even though such securities are not
registered under the 1933 Act. T. Rowe Price under the
supervision of the Fund's Board of Directors, will consider
whether securities purchased under Rule 144A are illiquid and
thus subject to the Fund's restriction of investing no more than
15% of its assets in illiquid securities. A determination of
whether a Rule 144A security is liquid or not is a question of
fact. In making this determination, T. Rowe Price will consider
the trading markets for the specific security taking into account
the unregistered nature of a Rule 144A security. In addition, T.
Rowe Price could consider the (1) frequency of trades and quotes,
(2) number of dealers and potential purchases, (3) dealer
undertakings to make a market, and (4) the nature of the security
and of marketplace trades (e.g., the time needed to dispose of
the security, the method of soliciting offers and the mechanics
of transfer). The liquidity of Rule 144A securities would be
monitored, and if as a result of changed conditions it is
determined that a Rule 144A security is no longer liquid, the
Fund's holdings of illiquid securities would be reviewed to
determine what, if any, steps are required to assure that the
Fund does not invest more than 15% of its assets in illiquid
securities. Investing in Rule 144A securities could have the
effect of increasing the amount of the Fund's assets invested in
illiquid securities if qualified institutional buyers are
unwilling to purchase such securities.
Warrants
The Fund may invest in warrants. Warrants are pure
speculation in that they have no voting rights, pay no dividends
and have no rights with respect to the assets of the corporation
issuing them. Warrants basically are options to purchase equity
securities at a specific price valid for a specific period of
time. They do not represent ownership of the securities, but
only the right to buy them. Warrants differ from call options in
that warrants are issued by the issuer of the security which may
be purchased on their exercise, whereas call options may be
written or issued by anyone. The prices of warrants do not
necessarily move parallel to the prices of the underlying
securities.
PAGE 9
PORTFOLIO MANAGEMENT PRACTICES
Lending of Portfolio Securities
Securities loans are made to broker-dealers or
institutional investors or other persons, pursuant to agreements
requiring that the loans be continuously secured by collateral at
least equal at all times to the value of the securities lent
marked to market on a daily basis. The collateral received will
consist of cash, U.S. government securities, letters of credit or
such other collateral as may be permitted under its investment
program. While the securities are being lent, the Fund will
continue to receive the equivalent of the interest or dividends
paid by the issuer on the securities, as well as interest on the
investment of the collateral or a fee from the borrower. The
Fund has a right to call each loan and obtain the securities on
five business days' notice or, in connection with securities
trading on foreign markets, within such longer period of time
which coincides with the normal settlement period for purchases
and sales of such securities in such foreign markets. The Fund
will not have the right to vote securities while they are being
lent, but it will call a loan in anticipation of any important
vote. The risks in lending portfolio securities, as with other
extensions of secured credit, consist of possible delay in
receiving additional collateral or in the recovery of the
securities or possible loss of rights in the collateral should
the borrower fail financially. Loans will only be made to firms
deemed by T. Rowe Price to be of good standing and will not be
made unless, in the judgment of T. Rowe Price, the consideration
to be earned from such loans would justify the risk.
Other Lending/Borrowing
Subject to approval by the Securities and Exchange
Commission and certain state regulatory agencies, the Fund may
make loans to, or borrow funds from, other mutual funds sponsored
or advised by T. Rowe Price or Price-Fleming (collectively,
"Price Funds"). The Fund has no current intention of engaging in
these practices at this time.
Repurchase Agreements
The Fund may enter into a repurchase agreement through
which an investor (such as the Fund) purchases a security (known
as the "underlying security") from a well-established securities
dealer or a bank that is a member of the Federal Reserve System.
Any such dealer or bank will be on T. Rowe Price's approved list
and have a credit rating with respect to its short-term debt of
at least A1 by Standard & Poor's Ratings Group, P1 by Moody's
Investors Service, or the equivalent rating by T. Rowe Price. At
that time, the bank or securities dealer agrees to repurchase the
underlying security at the same price, plus specified interest.
Repurchase agreements are generally for a short period of time,
often less than a week. Repurchase agreements which do not
provide for payment within seven days will be treated as illiquid
securities. The Fund will only enter into repurchase agreements
where (i) the underlying securities are of the type (excluding
maturity limitations) which the Fund's investment guidelines
would allow it to purchase directly, (ii) the market value of the
underlying security, including interest accrued, will be at all
times equal to or exceed the value of the repurchase agreement,
and (iii) payment for the underlying security is made only upon
physical delivery or evidence of book-entry transfer to the
account of the custodian or a bank acting as agent. In the event
of a bankruptcy or other default of a seller of a repurchase
agreement, the Fund could experience both delays in liquidating
the underlying security and losses, including: (a) possible
decline in the value of the underlying security during the period
while the Fund seeks to enforce its rights thereto; (b) possible
subnormal levels of income and lack
PAGE 10
of access to income during this period; and (c) expenses of
enforcing its rights.
Reverse Repurchase Agreements
Although the Fund has no current intention, in the
foreseeable future, of engaging in reverse repurchase agreements,
the Fund reserves the right to do so. Reverse repurchase
agreements are ordinary repurchase agreements in which a Fund is
the seller of, rather than the investor in, securities, and
agrees to repurchase them at an agreed upon time and price. Use
of a reverse repurchase agreement may be preferable to a regular
sale and later repurchase of the securities because it avoids
certain market risks and transaction costs. A reverse repurchase
agreement may be viewed as a type of borrowing by the Fund,
subject to Investment Restriction (1). (See "Investment
Restrictions," page 24.)
Options
Options are a type of potentially high-risk derivative.
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 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 PAGE 11
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 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
PAGE 12
transaction costs. The Fund will pay transaction costs in
connection with the writing of options to close out previously
written options. Such transaction costs are normally higher than
those applicable to purchases and sales of portfolio securities.
Call options written by the Fund will normally have
expiration dates of less than nine months from the date written.
The exercise price of the options may be below, equal to, or
above the current market values of the underlying securities or
currencies at the time the options are written. From time to
time, the Fund may purchase an underlying security or currency
for delivery in accordance with an exercise notice of a call
option assigned to it, rather than delivering such security or
currency from its portfolio. In such cases, additional costs may
be incurred.
The Fund will realize a profit or loss from a closing
purchase transaction if the cost of the transaction is less or
more than the premium received from the writing of the option.
Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying
security or currency, any loss resulting from the repurchase of a
call option is likely to be offset in whole or in part by
appreciation of the underlying security or currency owned by the
Fund.
Writing Covered Put Options
The Fund may write American or European style covered put
options and purchase options to close out options previously
written by the Fund. A put option gives the purchaser of the
option the right to sell, and the writer (seller) has the
obligation to buy, the underlying security or currency at the
exercise price during the option period (American style) or at
the expiration of the option (European style). So long as the
obligation of the writer continues, he may be assigned an
exercise notice by the broker-dealer through whom such option was
sold, requiring him to make payment of the exercise price against
delivery of the underlying security or currency. The operation
of put options in other respects, including their related risks
and rewards, is substantially identical to that of call options.
The Fund would write put options only on a covered basis,
which means that the Fund would maintain in a segregated account
cash, U.S. government securities or other liquid high-grade debt
obligations in an amount not less than the exercise price or the
Fund will own an option to sell the underlying security or
currency subject to the option having an exercise price equal to
or greater than the exercise price of the "covered" option at all
times while the put option is outstanding. (The rules of a
clearing corporation currently require that such assets be
deposited in escrow to secure payment of the exercise price.)
The Fund would generally write covered put options in
circumstances where T. Rowe Price wishes to purchase the
underlying security or currency for the Fund's portfolio at a
price lower than the current market price of the security or
currency. In such event the Fund would write a put option at an
exercise price which, reduced by the premium received on the
option, reflects the lower price it is willing to pay. Since the
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
PAGE 13
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 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 PAGE 14
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 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
PAGE 15
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.
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
Futures are a type of potentially high-risk derivative.
Transactions in Futures
The Fund may enter into futures contracts, including stock
index, interest rate and currency futures ("futures or futures
contracts").
Stock index futures contracts may be used to provide a
hedge for a portion of the Fund's portfolio, as a cash management
tool, or as an efficient way for T. Rowe Price to implement
either an increase or decrease in portfolio market exposure in
response to changing market conditions. The Fund may purchase or
sell futures contracts with respect to any stock index.
Nevertheless, to hedge the Fund's portfolio successfully, the
Fund must sell futures contacts with respect to indices or
subindices whose movements will have a significant correlation
with movements in the prices of the Fund's portfolio securities.
Interest rate or currency futures contracts may be used as
a hedge against changes in prevailing levels of interest rates or
currency exchange rates in order to establish more definitely the
effective return on securities or currencies held or intended to
be acquired by the Fund. In this regard, the Fund could sell
interest rate or currency futures as an offset against the effect
of expected increases in interest rates or currency exchange
rates and purchase such futures as an offset against the effect
of expected declines in interest rates or currency exchange
rates.
The Fund will enter into futures contracts which are traded
on national or foreign futures exchanges, and are standardized as
to maturity date and underlying financial instrument. Futures
exchanges and trading in the United States are regulated under
the Commodity Exchange Act by the CFTC. Futures are traded in
London, at the London International Financial Futures Exchange,
PAGE 16
in Paris, at the MATIF, and in Tokyo, at the Tokyo Stock
Exchange. Although techniques other than the sale and purchase
of futures contracts could be used for the above-referenced
purposes, futures contracts offer an effective and relatively low
cost means of implementing the Fund's objectives in these areas.
Regulatory Limitations
The Fund will engage in futures contracts and options
thereon only for bona fide hedging, yield enhancement, and risk
management purposes, in each case in accordance with rules and
regulations of the CFTC and applicable state law.
The Fund may not purchase or sell futures contracts or
related options if, with respect to positions which do not
qualify as bona fide hedging under applicable CFTC rules, the sum
of the amounts of initial margin deposits and premiums paid on
those positions would exceed 5% of the net asset value of the
Fund after taking into account unrealized profits and unrealized
losses on any such contracts it has entered into; provided,
however, that in the case of an option that is in-the-money at
the time of purchase, the in-the-money amount may be excluded in
calculating the 5% limitation. For purposes of this policy
options on futures contracts and foreign currency options traded
on a commodities exchange will be considered "related options".
This policy may be modified by the Board of Directors/Trustees
without a shareholder vote and does not limit the percentage of
the Fund's assets at risk to 5%.
In accordance with the rules of the State of California,
the Fund may have to apply the above 5% test without excluding
the value of initial margin and premiums paid for bona fide
hedging positions.
The Fund's use of futures contracts will not result in
leverage. Therefore, to the extent necessary, in instances
involving the purchase of futures contracts or the writing of
call or put options thereon by the Fund, an amount of cash, U.S.
government securities or other liquid, high-grade debt
obligations, equal to the market value of the futures contracts
and options thereon (less any related margin deposits), will be
identified in an account with the Fund's custodian to cover the
position, or alternative cover (such as owning an offsetting
position) will be employed. Assets used as cover or held in an
identified account cannot be sold while the position in the
corresponding option or future is open, unless they are replaced
with similar assets. As a result, the commitment of a large
portion of a Fund's assets to cover or identified accounts could
impede portfolio management or the fund's ability to meet
redemption requests or other current obligations.
If the CFTC or other regulatory authorities adopt different
(including less stringent) or additional restrictions, the Fund
would comply with such new restrictions.
Trading in Futures Contracts
A futures contract provides for the future sale by one
party and purchase by another party of a specified amount of a
specific financial instrument (e.g., units of a stock index) for
a specified price, date, time and place designated at the time
the contract is made. Brokerage fees are incurred when a futures
contract is bought or sold and margin deposits must be
maintained. Entering into a contract to buy is commonly referred
to as buying or purchasing a contract or holding a long position.
Entering into a contract to sell is commonly referred to as
selling a contract or holding a short position.
PAGE 17
Unlike when the Fund purchases or sells a security, no
price would be paid or received by the Fund upon the purchase or
sale of a futures contract. Upon entering into a futures
contract, and to maintain the Fund's open positions in futures
contracts, the Fund would be required to deposit with its
custodian in a segregated account in the name of the futures
broker an amount of cash, U.S. government securities, suitable
money market instruments, or liquid, high-grade debt securities,
known as "initial margin." The margin required for a particular
futures contract is set by the exchange on which the contract is
traded, and may be significantly modified from time to time by
the exchange during the term of the contract. Futures contracts
are customarily purchased and sold on margins that may range
upward from less than 5% of the value of the contract being
traded.
If the price of an open futures contract changes (by
increase in the case of a sale or by decrease in the case of a
purchase) so that the loss on the futures contract reaches a
point at which the margin on deposit does not satisfy margin
requirements, the broker will require an increase in the margin.
However, if the value of a position increases because of
favorable price changes in the futures contract so that the
margin deposit exceeds the required margin, the broker will pay
the excess to the Fund.
These subsequent payments, called "variation margin," to
and from the futures broker, are made on a daily basis as the
price of the underlying assets fluctuate making the long and
short positions in the futures contract more or less valuable, a
process known as "marking to the market." The Fund expects to
earn interest income on its margin deposits.
Although certain futures contracts, by their terms, require
actual future delivery of and payment for the underlying
instruments, in practice most futures contracts are usually
closed out before the delivery date. Closing out an open futures
contract purchase or sale is effected by entering into an
offsetting futures contract sale or purchase, respectively, for
the same aggregate amount of the identical securities and the
same delivery date. If the offsetting purchase price is less
than the original sale price, the Fund realizes a gain; if it is
more, the Fund realizes a loss. Conversely, if the offsetting
sale price is more than the original purchase price, the Fund
realizes a gain; if it is less, the Fund realizes a loss. The
transaction costs must also be included in these calculations.
There can be no assurance, however, that the Fund will be able to
enter into an offsetting transaction with respect to a particular
futures contract at a particular time. If the Fund is not able
to enter into an offsetting transaction, the Fund will continue
to be required to maintain the margin deposits on the futures
contract.
For example, the Standard & Poor's 500 Stock Index is
composed of 500 selected common stocks, most of which are listed
on the New York Stock Exchange. The S&P 500 Index assigns
relative weightings to the common stocks included in the Index,
and the Index fluctuates with changes in the market values of
those common stocks. In the case of the S&P 500 Index, contracts
are to buy or sell 500 units. Thus, if the value of the S&P 500
Index were $150, one contract would be worth $75,000 (500 units x
$150). The stock index futures contract specifies that no
delivery of the actual stock making up the index will take place.
Instead, settlement in cash occurs. Over the life of the
contract, the gain or loss realized by the Fund will equal the
difference between the purchase (or sale) price of the contract
and the price at which the contract is terminated. For example,
if the Fund enters into a futures 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
PAGE 18
date at a contract price of $150 and the S&P 500 Index is at $152
on that future date, the Fund will lose $1,000 (500 units x loss
of $2).
Special Risks of Transactions in Futures Contracts
Volatility and Leverage. The prices of futures contracts
are volatile and are influenced, among other things, by actual
and anticipated changes in the market and interest rates, which
in turn are affected by fiscal and monetary policies and national
and international political and economic events.
Most United States futures exchanges limit the amount of
fluctuation permitted in futures contract prices during a single
trading day. The daily limit establishes the maximum amount that
the price of a futures contract may vary either up or down from
the previous day's settlement price at the end of a trading
session. Once the daily limit has been reached in a particular
type of futures contract, no trades may be made on that day at a
price beyond that limit. The daily limit governs only price
movement during a particular trading day and therefore does not
limit potential losses, because the limit may prevent the
liquidation of unfavorable positions. Futures contract prices
have occasionally moved to the daily limit for several
consecutive trading days with little or no trading, thereby
preventing prompt liquidation of futures positions and subjecting
some futures traders to substantial losses.
Because of the low margin deposits required, futures
trading involves an extremely high degree of leverage. As a
result, a relatively small price movement in a futures contract
may result in immediate and substantial loss, as well as gain, to
the investor. For example, if at the time of purchase, 10% of
the value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract
would result in a total loss of the margin deposit, before any
deduction for the transaction costs, if the account were then
closed out. A 15% decrease would result in a loss equal to 150%
of the original margin deposit, if the contract were closed out.
Thus, a purchase or sale of a futures contract may result in
losses in excess of the amount invested in the futures contract.
However, the Fund would presumably have sustained comparable
losses if, instead of the futures contract, it had invested in
the underlying financial instrument and sold it after the
decline. Furthermore, in the case of a futures contract
purchase, in order to be certain that the Fund has sufficient
assets to satisfy its obligations under a futures contract, the
Fund earmarks to the futures contract money market instruments
equal in value to the current value of the underlying instrument
less the margin deposit.
Liquidity. The Fund may elect to close some or all of its
futures positions at any time prior to their expiration. The
Fund would do so to reduce exposure represented by long futures
positions or short futures positions. The Fund may close its
positions by taking opposite positions which would operate to
terminate the Fund's position in the futures contracts. Final
determinations of variation margin would then be made, additional
cash would be required to be paid by or released to the Fund, and
the Fund would realize a loss or a gain.
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.
PAGE 19
However, in the event futures contracts have been used to hedge
the underlying instruments, the Fund would continue to hold the
underlying instruments subject to the hedge until the futures
contracts could be terminated. In such circumstances, an
increase in the price of underlying instruments, if any, might
partially or completely offset losses on the futures contract.
However, as described below, there is no guarantee that the price
of the underlying instruments will, in fact, correlate with the
price movements in the futures contract and thus provide an
offset to losses on a futures contract.
Hedging Risk. A decision of whether, when, and how to
hedge involves skill and judgment, and even a well-conceived
hedge may be unsuccessful to some degree because of unexpected
market behavior, market or interest rate trends. There are
several risks in connection with the use by the Fund of futures
contracts as a hedging device. One risk arises because of the
imperfect correlation between movements in the prices of the
futures contracts and movements in the prices of the underlying
instruments which are the subject of the hedge. T. Rowe Price
will, however, attempt to reduce this risk by entering into
futures contracts whose movements, in its judgment, will have a
significant correlation with movements in the prices of the
Fund's underlying instruments sought to be hedged.
Successful use of futures contracts by the Fund for hedging
purposes is also subject to T. Rowe Price's ability to correctly
predict movements in the direction of the market. It is possible
that, when the Fund has sold futures to hedge its portfolio
against a decline in the market, the index, indices, or
instruments underlying futures might advance and the value of the
underlying instruments held in the Fund's portfolio might
decline. If this were to occur, the Fund would lose money on the
futures and also would experience a decline in value in its
underlying instruments. However, while this might occur to a
certain degree, T. Rowe Price believes that over time the value
of the Fund's portfolio will tend to move in the same direction
as the market indices used to hedge the portfolio. It is also
possible that if the Fund were to hedge against the possibility
of a decline in the market (adversely affecting the underlying
instruments held in its portfolio) and prices instead increased,
the Fund would lose part or all of the benefit of increased value
of those underlying instruments that it has hedged, because it
would have offsetting losses in its futures positions. In
addition, in such situations, if the Fund had insufficient cash,
it might have to sell underlying instruments to meet daily
variation margin requirements. Such sales of underlying
instruments might be, but would not necessarily be, at increased
prices (which would reflect the rising market). The Fund might
have to sell underlying instruments at a time when it would be
disadvantageous to do so.
In addition to the possibility that there might be an
imperfect correlation, or no correlation at all, between price
movements in the futures contracts and the portion of the
portfolio being hedged, the price movements of futures contracts
might not correlate perfectly with price movements in the
underlying instruments due to certain market distortions. First,
all participants in the futures market are subject to margin
deposit and maintenance requirements. Rather than meeting
additional margin deposit requirements, investors might close
futures contracts through offsetting transactions, which could
distort the normal relationship between the underlying
instruments and futures markets. Second, the margin requirements
in the futures market are less onerous than margin requirements
in the securities markets, and as a result the futures market
might attract more speculators than the securities markets do.
Increased participation by speculators in the futures market
might also cause temporary price distortions. Due to the
possibility of price distortion in the futures market and also
because of the imperfect correlation between price movements in
the underlying instruments and movements in the prices of futures
contracts, even PAGE 20
a correct forecast of general market trends by T. Rowe Price
might not result in a successful hedging transaction over a very
short time period.
Options on Futures Contracts
The Fund may purchase and sell options on the same types of
futures in which it may invest.
Options on futures are similar to options on underlying
instruments except that options on futures give the purchaser the
right, in return for the premium paid, to assume a position in a
futures contract (a long position if the option is a call and a
short position if the option is a put), rather than to purchase
or sell the futures contract, at a specified exercise price at
any time during the period of the option. Upon exercise of the
option, the delivery of the futures position by the writer of the
option to the holder of the option will be accompanied by the
delivery of the accumulated balance in the writer's futures
margin account which represents the amount by which the market
price of the futures contract, at exercise, exceeds (in the case
of a call) or is less than (in the case of a put) the exercise
price of the option on the futures contract. Purchasers of
options who fail to exercise their options prior to the exercise
date suffer a loss of the premium paid.
As an alternative to writing or purchasing call and put
options on stock index futures, the Fund may write or purchase
call and put options on stock indices. Such options would be
used in a manner similar to the use of options on futures
contracts. From time to time, a single order to purchase or sell
futures contracts (or options thereon) may be made on behalf of
the Fund and other T. Rowe Price Funds. Such aggregated orders
would be allocated among the Funds and the other T. Rowe Price
Funds in a fair and non-discriminatory manner.
Special Risks of Transactions in Options on Futures Contracts
The risks described under "Special Risks of Transactions on
Futures Contracts" are substantially the same as the risks of
using options on futures. In addition, where the Fund seeks to
close out an option position by writing or buying an offsetting
option covering the same index, underlying instrument or contract
and having the same exercise price and expiration date, its
ability to establish and close out positions on such options will
be subject to the maintenance of a liquid secondary market.
Reasons for the absence of a liquid secondary market on an
exchange include the following: (i) there may be insufficient
trading interest in certain options; (ii) restrictions may be
imposed by an exchange on opening transactions or closing
transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or
series of options, or underlying instruments; (iv) unusual or
unforeseen circumstances may interrupt normal operations on an
exchange; (v) the facilities of an exchange or a clearing
corporation may not at all times be adequate to handle current
trading volume; or (vi) one or more exchanges could, for economic
or other reasons, decide or be compelled at some future date to
discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that
exchange (or in the class or series of options) would cease to
exist, although outstanding options on the exchange that had been
issued by a clearing corporation as a result of trades on that
exchange would continue to be exercisable in accordance with
their terms. There is no assurance that higher than anticipated
trading activity or other unforeseen events might not, at times,
render certain of the facilities of any of the clearing
corporations inadequate, and thereby result in the institution by
an exchange of special procedures which may interfere with the
timely execution of customers' orders.
PAGE 21
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, when the
Fund trades foreign futures or foreign options contracts, it may
not be afforded certain of the protective measures provided by
the Commodity Exchange Act, the CFTC's regulations and the rules
of the National Futures Association and any domestic exchange,
including the right to use reparations proceedings before the
Commission and arbitration proceedings provided by the National
Futures Association or any domestic futures exchange. In
particular, funds received from the Fund for foreign futures or
foreign options transactions may not be provided the same
protections as funds received in respect of transactions on
United States futures exchanges. In addition, the price of any
foreign futures or foreign options contract and, therefore, the
potential profit and loss thereon may be affected by any variance
in the foreign exchange rate between the time the Fund's order is
placed and the time it is liquidated, offset or exercised.
Foreign Currency Transactions
A forward foreign currency contract ("forward contract")
involves an obligation to purchase or sell a specific currency at
a future date, which may be any fixed number of days from the
date of the contract agreed upon by the parties, at a price set
at the time of the contract. These contracts are principally
traded in the interbank market conducted directly between
currency traders (usually large, commercial banks) and its
customers. A forward contract generally has no deposit
requirement, and no commissions are charged at any stage for
trades.
The Fund may enter into forward contracts for a variety of
purposes in connection with the management of the foreign
securities portion of its portfolio. The Fund's use of such
contracts would include, but not be limited to, the following:
First, when the Fund enters into a contract for the
purchase or sale of a security denominated in a foreign currency,
it may desire to "lock in" the U.S. dollar price of the security.
By entering into a forward contract for the purchase or sale, for
a fixed amount of dollars, of the amount of foreign currency
involved in the underlying security transactions, the Fund will
be able to protect itself against a possible loss resulting from
an adverse change in the relationship between the U.S. dollar and
the subject foreign currency during the period between the date
the security is purchased or sold and the date on which payment
is made or received.
PAGE 22
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. Under normal circumstances, consideration of the
prospect for currency parities will be incorporated into the
longer term investment decisions made with regard to overall
diversification strategies. However, T. Rowe Price believes that
it is important to have the flexibility to enter into such
forward contracts when it determines that the best interests of
the Fund will be served.
The Fund may enter into forward contacts for any other
purpose consistent with the Fund's investment objective and
program. However, the Fund will not enter into a forward
contract, or maintain exposure to any such contract(s), if the
amount of foreign currency required to be delivered thereunder
would exceed the Fund's holdings of liquid, high-grade debt
securities and currency available for cover of the forward
contract(s). In determining the amount to be delivered under a
contract, the Fund may net offsetting positions.
At the maturity of a forward contract, the Fund may sell
the portfolio security and make delivery of the foreign currency,
or it may retain the security and either extend the maturity of
the forward contract (by "rolling" that contract forward) or may
initiate a new forward contract.
If the Fund retains the portfolio security and engages in
an offsetting transaction, the Fund will incur a gain or a loss
(as described below) to the extent that there has been movement
in forward contract prices. If the Fund engages in an offsetting
transaction, it may subsequently enter into a new forward
contract to sell the foreign currency. Should forward prices
decline during the period between the Fund's entering into a
forward contract for the sale of a foreign currency and the date
it enters into an offsetting contract for the purchase of the
foreign currency, the Fund will realize a gain to the extent the
price of the currency it has agreed to sell exceeds the price of
the currency it has agreed to purchase. Should forward prices
increase, the Fund will suffer a loss to the extent of the price
of the currency it has agreed to purchase exceeds the price of
the currency it has agreed to sell.
The Fund's dealing in forward foreign currency exchange
contracts will generally be limited to the transactions described
above. However, the Fund reserves the right to enter into
forward foreign currency contracts for different purposes and
under different circumstances. Of course, the Fund is not
required to enter into forward contracts with regard to its
foreign currency-denominated securities and will not do so unless
deemed appropriate by T. Rowe Price. It also should be realized
that this method of hedging
PAGE 23
against a decline in the value of a currency does not eliminate
fluctuations in the underlying prices of the securities. It
simply establishes a rate of exchange at a future date.
Additionally, although such contracts tend to minimize the risk
of loss due to a decline in the value of the hedged currency, at
the same time, they tend to limit any potential gain which might
result from an increase in the value of that currency.
Although the Fund values its assets daily in terms of U.S.
dollars, it does not intend to convert its holdings of foreign
currencies into U.S. dollars on a daily basis. It will do so
from time to time, and investors should be aware of the costs of
currency conversion. Although foreign exchange dealers do not
charge a fee for conversion, they do realize a profit based on
the difference (the "spread") between the prices at which they
are buying and selling various currencies. Thus, a dealer may
offer to sell a foreign currency to the Fund at one rate, while
offering a lesser rate of exchange should the Fund desire to
resell that currency to the dealer.
Federal Tax Treatment of Options, Futures Contracts and Forward
Foreign Exchange Contracts
The Fund may enter into certain option, futures, and
forward foreign exchange contracts, including options and futures
on currencies, which will be treated as Section 1256 contracts or
straddles.
Transactions which are considered Section 1256 contracts
will be considered to have been closed at the end of the Fund's
fiscal year and any gains or losses will be recognized for tax
purposes at that time. Such gains or losses from the normal
closing or settlement of such transactions will be characterized
as 60% long-term capital gain or loss and 40% short-term capital
gain or loss regardless of the holding period of the instrument.
The Fund will be required to distribute net gains on such
transactions to shareholders even though it may not have closed
the transaction and received cash to pay such distributions.
Options, futures and forward foreign exchange contracts,
including options and futures on currencies, which offset a
foreign dollar denominated bond or currency position may be
considered straddles for tax purposes, in which case a loss on
any position in a straddle will be subject to deferral to the
extent of unrealized gain in an offsetting position. The holding
period of the securities or currencies comprising the straddle
will be deemed not to begin until the straddle is terminated.
For securities offsetting a purchased put, this adjustment of the
holding period may increase the gain from sales of securities
held less than three months. The holding period of the security
offsetting an "in-the-money qualified covered call" option on an
equity security will not include the period of time the option is
outstanding.
Losses on written covered calls and purchased puts on
securities, excluding certain "qualified covered call" options on
equity securities, may be long-term capital loss, if the security
covering the option was held for more than twelve months prior to
the writing of the option.
In order for the Fund to continue to qualify for federal
income tax treatment as a regulated investment company, at least
90% of its gross income for a taxable year must be derived from
qualifying income; i.e., dividends, interest, income derived from
loans of securities, and gains from the sale of 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 PAGE
24
or securities indexes and, in some cases, currencies, held for
less than three months, must be limited to less than 30% of the
Fund's annual gross income. In order to avoid realizing
excessive gains on securities or currencies held less than three
months, the Fund may be required to defer the closing out of
option, futures or foreign forward exchange contracts beyond the
time when it would otherwise be advantageous to do so. It is
anticipated that unrealized gains on Section 1256 option, futures
and foreign forward exchange contracts, which have been open for
less than three months as of the end of the Fund's fiscal year
and which are recognized for tax purposes, will not be considered
gains on securities or currencies held less than three months for
purposes of the 30% test.
INVESTMENT RESTRICTIONS
Fundamental policies of the Fund may not be changed without
the approval of the lesser of (1) 67% of the Fund's shares
present at a meeting of shareholders if the holders of more than
50% of the outstanding shares are present in person or by proxy
or (2) more than 50% of the Fund's outstanding shares. Other
restrictions in the form of operating policies are subject to
change by the Fund's Board of Directors without shareholder
approval. Any investment restriction set forth herein or in the
prospectus which involves a maximum percentage of securities or
assets shall not be considered to be violated unless an excess
over the percentage occurs immediately after, and is caused by,
an acquisition of securities or assets of, or borrowings by, the
Fund.
Fundamental Policies
As a matter of fundamental policy, the Fund may not
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 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
PAGE 25
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,
including limited partnership interests therein,
unless acquired as a result of ownership of
securities or other instruments (but this shall not
prevent the Fund from investing in securities or
other instruments backed by real estate or
securities of companies engaged in the real estate
business);
(8) Senior Securities. Issue senior securities except
in compliance with the Investment Company Act of
1940; or
(9) Underwriting. Underwrite securities issued by other
persons, except to the extent that the Fund may be
deemed to be an underwriter within the meaning of
the Securities Act of 1933 in connection with the
purchase and sale of its portfolio securities in the
ordinary course of pursuing its investment program.
NOTES
The following notes should be read in connection
with the above-described fundamental policies. The
notes are not fundamental policies.
With respect to investment restrictions (1) and (4),
the Fund will not borrow from or lend to any other
Price Fund (defined as any other mutual fund managed
or for which T. Rowe Price acts as adviser) unless
each Fund applies for and receives an exemptive
order from the SEC or the SEC issues rules
permitting such transactions. The Fund has no
current intention of engaging in any such activity
and there is no assurance the SEC would grant any
order requested by the Fund or promulgate any rules
allowing the transactions.
With respect to investment restriction (2), the Fund
does not consider currency contracts or hybrid
investments to be commodities.
For purposes of investment restriction (3), U.S.,
state or local governments, or related agencies or
instrumentalities,
PAGE 26
are not considered an industry. Industries are
determined by reference to the classifications of
industries set forth in the Fund's semi-annual and
annual reports.
For purposes of investment restriction (4), the Fund
will consider the acquisition of a debt security to
include the execution of a note or other evidence of
an extension of credit with a term of more than nine
months.
Operating Policies
As a matter of operating policy, the Fund may not:
(1) Borrowing. (a) The Fund will not purchase
additional securities when money borrowed exceeds 5%
of its total assets;
(b) The Fund will limit borrowing for any variable
annuity separate account to (1) 10% of net asset
value when borrowing for any general purpose, and
(2) 25% of net asset value when borrowing as a
temporary measure to facilitate redemptions.
Net asset value of a portfolio is the market value
of all investments or assets owned less outstanding
liabilities of the portfolio at the time that any
new or additional borrowing is undertaken.
(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 10% of its total assets in
restricted securities provided that securities
eligible for resale under Rule 144A are not subject
to the 10% limit;
(5) Investment Companies. Purchase securities of open-
end or closed-end investment companies except in
compliance with the Investment Company Act of 1940
and applicable state law. Duplicate fees could
result from any such purchases;
(6) Margin. Purchase securities on margin, except (i)
for use of short-term credit necessary for clearance
of purchases of portfolio securities and (ii) it may
make margin deposits in connection with futures
contracts or other permissible investments;
PAGE 27
(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 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 net assets
of the Fund would be invested in warrants which are
not listed on the New York Stock Exchange, the
American Stock Exchange, or a recognized foreign
exchange, or more than 5% of the value of the net
assets of the Fund would be invested in warrants
whether or not so listed. For purposes of these
percentage limitations, the warrants will be valued
at the lower of cost or market and warrants acquired
by the Funds in units or attached to securities may
be deemed to be without value.
Notwithstanding anything in the above fundamental and
operating restrictions to the contrary, the Fund may invest all
of its assets in a single investment company or a series thereof
in connection with a "master-feeder" arrangement. Such an
investment would be made where the Fund (a "Feeder"), and one or
more other Funds with the same investment objective and program
as the Fund, sought to accomplish its investment objective and
program by investing all of its assets in the shares of another
investment company (the "Master"). The Master would, in turn,
have the same investment objective and program as the Fund. The
Fund would invest in this manner in an effort to achieve the
economies of scale associated with having a Master fund make
investments in portfolio companies on behalf of a number of
Feeder funds.
PAGE 28
MANAGEMENT OF FUND
The officers and directors of the Fund are listed below.
Unless otherwise noted, the address of each is 100 East Pratt
Street, Baltimore, Maryland 21202. Except as indicated, each has
been an employee of T. Rowe Price for more than five years. In
the list below, the Fund's directors who are considered
"interested persons" of T. Rowe Price or the Fund as defined
under Section 2(a)(19) of the Investment Company Act of 1940 are
noted with an asterisk (*). These directors are referred to as
inside directors by virtue of their officership, directorship,
and/or employment with T. Rowe Price.
DONALD W. DICK, JR., Director--Principal, Overseas Partners,
Inc., a financial investment firm; formerly (6/65-3/89) Director
and Vice President-Consumer Products Division, McCormick &
Company, Inc., international food processors; Director, Waverly,
Inc., Baltimore, Maryland; Address: 111 Pavonia Avenue, Suite
334, Jersey City, New Jersey 07310
DAVID K. FAGIN, Director--Chairman, Chief Executive Officer and
Director, Golden Star Resources, Ltd.; formerly (1986-7/91)
President, Chief Operating Officer and Director, Homestake Mining
Company; Address: One Norwest Center, 1700 Lincoln Street, Suite
1950, Denver, Colorado 80203
HANNE M. MERRIMAN, Director--Retail business consultant; formerly
President and Chief Operating Officer (1991-92), Nan Duskin,
Inc., a women's specialty store, Director (1984-1990) and
Chairman (1989-90) Federal Reserve Bank of Richmond, and
President and Chief Executive Officer (1988-89), Honeybee, Inc.,
a division of Spiegel, Inc.; Director, Central Illinois Public
Service Company, CIPSCO Incorporated, The Rouse Company, State
Farm Mutual Automobile Insurance Company and USAir Group, Inc.
*JOHN H. LAPORTE, JR., Executive Vice President and Director--
Managing Director, T. Rowe Price; Chartered Financial Analyst
*JAMES S. RIEPE, Vice President and Director--Managing Director,
T. Rowe Price; Chairman of the Board, T. Rowe Price Services,
Inc., T. Rowe Price Retirement Plan Services, Inc., and T. Rowe
Price Investment Services, Inc; President and Trust Officer, T.
Rowe Price Trust Company; Director, Rowe Price-Fleming
International, Inc. and Rhone-Poulenc Rorer, Inc.
*M. DAVID TESTA, President and Director--Chairman of the Board,
Price-Fleming; Managing Director, T. Rowe Price; Vice President
and Director, T. Rowe Price Trust Company; Chartered Financial
Analyst; Chartered Investment Counselor
HUBERT D. VOS, Director--President, Stonington Capital
Corporation, a private investment company; Address: 1231 State
Street, Suite 247, Santa Barbara, California 93190-0409
PAUL M. WYTHES, Director--Founding General Partner, Sutter Hill
Ventures, a venture capital limited partnership, providing equity
capital to young high technology companies throughout the United
States; Director, Teltone Corporation, Interventional
Technologies Inc. and Stuart Medical, Inc.; Address: 755 Page
Mill Road, Suite A200, Palo Alto, California 94304
BRIAN W.H. BERGHUIS, Executive Vice President--Vice President, T.
Rowe Price; Chartered Financial Analyst
BRIAN C. ROGERS, Executive Vice President--Managing Director, T.
Rowe Price; Chartered Financial Analyst
MARC L. BAYLIN, Vice President--Assistant Vice President, T. Rowe
Price; formerly financial analyst, Rausher Pierce Refsnes
THOMAS H. BROADUS, JR., Vice President--Managing Director, T.
Rowe Price; Chartered Financial Analyst and Chartered Investment
Counselor
ANDREW M. BROOKS, Vice President--Vice President, T. Rowe Price
GREGORY V. DONOVAN, Vice President--Vice President, T. Rowe Price
ROBERT N. GENSLER, Vice President--Vice President, T. Rowe Price
PAGE 29
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.
THOMAS J. HUBER, Vice President--Employee, T. Rowe Price
JAMES A.C. KENNEDY, III, Vice President--Managing Director, T.
Rowe Price; Chartered Financial Analyst
ROBERT J. MARCOTTE, Vice President--Vice President, T. Rowe Price
CHARLES A. MORRIS, Vice President--Vice President of T. Rowe
Price; Chartered Financial Analyst
CHARLES G. PEPIN, Vice President--Employee, T. Rowe Price
DONALD J. PETERS, Vice President--Vice President, T. Rowe Price;
formerly portfolio manager, Geewax Terker and Company
STEVEN B. ROORDA, Vice President--Vice President, T. Rowe Price
BRIAN D. STANSKY, Vice President--Vice President, T. Rowe Price;
Chartered Financial Analyst
WILLIAM J. STROMBERG, Vice President--Vice President, T. Rowe
Price; Chartered Financial Analyst
DANIEL M. THERIAULT, Vice President--Vice President, T. Rowe
Price, Chartered Financial Analyst; formerly Securities Analyst,
John A. Levin & Co.
MARK J. VASELKIV, Vice President--Vice President, T. Rowe Price
JOHN F. WAKEMAN, Vice President--Vice President, T. Rowe Price
RICHARD T. WHITNEY, Vice President--Vice President, T. Rowe
Price; Chartered Financial Analyst
LENORA V. HORNUNG, Secretary--Vice President, T. Rowe Price
PATRICIA S. BUTCHER, Assistant Secretary--Assistant Vice
President, T. Rowe Price and T. Rowe Price Investment Services,
Inc.
CARMEN F. DEYESU, Treasurer--Vice President, T. Rowe Price, T.
Rowe Price Services, Inc., and T. Rowe Price Trust Company
DAVID S. MIDDLETON, Controller--Vice President, T. Rowe Price, T.
Rowe Price Services, Inc., and T. Rowe Price Trust Company
J. JEFFREY LANG, Assistant Vice President--Assistant Vice
President, T. Rowe Price
INGRID I. VORDEMBERGE, Assistant Vice President--Employee, T.
Rowe Price
The Fund's Executive Committee, comprised of Messrs.
Kennedy, Laporte, and Riepe have been authorized by its Board of
Directors to exercise all powers of the Board to manage the Fund
in the intervals between meetings of the Board, except the powers
prohibited by statute from being delegated.
COMPENSATION TABLE
The Fund does not pay pension or retirement benefits to its
officers or directors. Also, any director of the Fund who is an
officer or employee of T. Rowe Price does not receive any
remuneration from the Fund.
_________________________________________________________________
Total Compensation
from Fund and
Name of Aggregate Fund Complex
Person, Compensation Paid to
Position from Fund(a) Directors(b)
_________________________________________________________________
Donald W. Dick, Jr., -- $70,083
Director
David K. Fagin, -- 57,833
Director
PAGE 30
Hanne M. Merriman, -- 57,833
Director
Hubert D. Vos, -- 57,833
Director
Paul M. Wythes, -- 57,833
Director
(a) No estimated future payments for fiscal year 1996.
(b) Amounts in this column are for calendar year 1995. The Fund
complex consisted of 72 funds as of December 31, 1995.
PRINCIPAL HOLDERS OF SECURITIES
As of the date of the prospectus, the officers and directors
of the Fund, as a group, did not own any shares of the Fund.
INVESTMENT MANAGEMENT SERVICES
Services Provided by T. Rowe Price
Under the Management Agreement with the Fund, T. Rowe Price
provides the Fund with discretionary investment services.
Specifically, T. Rowe Price is responsible for supervising and
directing the investments of the Fund in accordance with its
investment objective, program, and restrictions as provided in
the prospectus and this Statement of Additional Information. T.
Rowe Price is also responsible for effecting all security
transactions on behalf of the Fund, including the allocation of
principal business and portfolio brokerage and the negotiation of
commissions. In addition to these services, T. Rowe Price
provides the Fund with certain corporate administrative services,
including: maintaining the Fund's corporate existence, corporate
records, and registering and qualifying the Fund's shares under
federal and state laws; monitoring the financial, accounting, and
administrative functions of the Fund; maintaining liaison with
the agents employed by the Fund such as the Fund's custodian and
transfer agent; assisting the Fund in the coordination of such
agents' activities; and permitting T. Rowe Price's employees to
serve as officers, directors, and committee members of the Fund
without cost to the Fund.
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 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.
PAGE 31
The Management Agreement between the Fund and T. Rowe Price
provides that T. Rowe Price will pay all expenses of the Fund's
operations, except interest, taxes, brokerage commissions and
other charges incident to the purchase, sale or lending of the
Fund's portfolio securities, directors' fee and expenses
(including counsel fees and expenses) and such nonrecurring or
extraordinary expenses that may arise, including the costs of
actions, suits, or proceedings to which the Fund is a party and
the expenses the Fund may incur as a result of its obligation to
provide indemnification to its officers, directors and agents.
However, the Board of Directors of the Fund reserves the right to
impose additional fees against shareholder accounts to defray
expenses which would otherwise be paid by T. Rowe Price under the
Management Agreement. The Board does not anticipate levying such
charges; such a fee, if charged, may be retained by the Fund or
paid to T. Rowe Price.
DISTRIBUTOR FOR FUND
T. Rowe Price Investment Services, Inc. ("Investment
Services"), a Maryland corporation formed in 1980 as a wholly-
owned subsidiary of T. Rowe Price, serves as the Fund's
distributor. Investment Services is registered as a broker-
dealer under the Securities Exchange Act of 1934 and is a member
of the National Association of Securities Dealers, Inc. The
offering of the Fund's shares is continuous.
Investment Services is located at the same address as the
Fund and T. Rowe Price -- 100 East Pratt Street, Baltimore,
Maryland 21202.
Investment Services serves as distributor to the Fund
pursuant to an Underwriting Agreement ("Underwriting Agreement"),
which provides that the Fund will pay all fees and expenses in
connection with: registering and qualifying its shares under the
various state "blue sky" laws; preparing, setting in type,
printing, and mailing its prospectuses and reports to
shareholders; and issuing its shares, including expenses of
confirming purchase orders.
The Underwriting Agreement provides that Investment Services
will pay all fees and expenses in connection with: printing and
distributing prospectuses and reports for use in offering and
selling Fund shares; preparing, setting in type, printing, and
mailing all sales literature and advertising; Investment
Services' federal and state registrations as a broker-dealer; and
offering and selling Fund shares, except for those fees and
expenses specifically assumed by the Fund. Investment Services'
expenses are paid by T. Rowe Price.
Investment Services acts as the agent of the Fund in
connection with the sale of the Fund shares in all states in
which the shares are qualified and in which Investment Services
is qualified as a broker-dealer. Under the Underwriting
Agreement, Investment Services accepts orders for Fund shares at
net asset value. No sales charges are paid by investors or the
Fund.
CUSTODIAN
State Street Bank and Trust Company (the "Bank") is the
custodian for the Fund's U.S. securities and cash, but it does
not participate in the Fund's investment decisions. Portfolio
securities purchased in the U.S. are maintained in the custody of
the Bank and may be entered into the Federal Reserve Book Entry
System, or the security depository system of the Depository Trust
Corporation. The Fund has entered into a Custodian Agreement
with The Chase Manhattan Bank, N.A., London, pursuant to which
portfolio securities
PAGE 32
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. State Street Bank's
main office is at 225 Franklin Street, Boston, Massachusetts
02110. The address for The Chase Manhattan Bank, N.A., London is
Woolgate House, Coleman Street, London, EC2P 2HD, England.
CODE OF ETHICS
The Fund's investment adviser (T. Rowe Price) has a written
Code of Ethics which requires all employees to obtain prior
clearance before engaging in personal securities transactions.
Transactions must be executed within three business days of their
clearance. In addition, all employees must report their personal
securities transactions within ten days of their execution.
Employees will not be permitted to effect transactions in a
security: If there are pending client orders in the security; the
security has been purchased or sold by a client within seven
calendar days; the security is being considered for purchase for
a client; a change has occurred in T. Rowe Price's rating of the
security within seven calendar days prior to the date of the
proposed transaction; or the security is subject to internal
trading restrictions. In addition, employees are prohibited from
profiting from short-term trading (e.g., purchases and sales
involving the same security within 60 days). Any material
violation of the Code of Ethics is reported to the Board of the
Fund. The Board also reviews the administration of the Code of
Ethics on an annual basis.
PORTFOLIO TRANSACTIONS
Investment or Brokerage Discretion
Decisions with respect to the purchase and sale of portfolio
securities on behalf of the Fund are made by T. Rowe Price. T.
Rowe Price is also responsible for implementing these decisions,
including the negotiation of commissions and the allocation of
portfolio brokerage and principal business.
How Brokers and Dealers are Selected
Equity Securities
In purchasing and selling the Fund's portfolio securities,
it is T. Rowe Price's policy to obtain quality execution at the
most favorable prices through responsible brokers and dealers
and, in the case of agency transactions, at competitive
commission rates. However, under certain conditions, the Fund may
pay higher brokerage commissions in return for brokerage and
research services. As a general practice, over-the-counter
orders are executed with market-makers. In selecting among
market-makers, T. Rowe Price generally seeks to select those it
believes to be actively and effectively trading the security
being purchased or sold. In selecting broker-dealers to execute
the Fund's portfolio transactions, consideration is given to such
factors as the price of the security, the rate of the commission,
the size and difficulty of the order, the reliability, integrity,
financial condition, general execution and operational
capabilities of competing brokers and dealers, and brokerage and
research services provided by them. It is not the policy of T.
Rowe Price to seek the lowest available commission rate where it
is believed that a broker or dealer charging a higher commission
rate would offer greater reliability or provide better price or
execution.
PAGE 33
Fixed Income Securities
Fixed income securities are generally purchased from the
issuer or a primary market-maker acting as principal for the
securities on a net basis, with no brokerage commission being
paid by the client although the price usually includes an
undisclosed compensation. Transactions placed through dealers
serving as primary market-makers reflect the spread between the
bid and asked prices. Securities may also be purchased from
underwriters at prices which include underwriting fees.
With respect to equity and fixed income securities, T. Rowe
Price may effect principal transactions on behalf of the Fund
with a broker or dealer who furnishes brokerage and/or research
services, designate any such broker or dealer to receive selling
concessions, discounts or other allowances, or otherwise deal
with any such broker or dealer in connection with the acquisition
of securities in underwritings. T. Rowe Price may receive
research services in connection with brokerage transactions,
including designations in fixed price offerings.
How Evaluations are Made of the Overall Reasonableness of
Brokerage Commissions Paid
On a continuing basis, T. Rowe Price seeks to determine what
levels of commission rates are reasonable in the marketplace for
transactions executed on behalf of the Fund. In evaluating the
reasonableness of commission rates, T. Rowe Price considers: (a)
historical commission rates, both before and since rates have
been fully negotiable; (b) rates which other institutional
investors are paying, based on available public information; (c)
rates quoted by brokers and dealers; (d) the size of a particular
transaction, in terms of the number of shares, dollar amount, and
number of clients involved; (e) the complexity of a particular
transaction in terms of both execution and settlement; (f) the
level and type of business done with a particular firm over a
period of time; and (g) the extent to which the broker or dealer
has capital at risk in the transaction.
Description of Research Services Received from Brokers and
Dealers
T. Rowe Price receives a wide range of research services
from brokers and dealers. These services include information on
the economy, industries, groups of securities, individual
companies, statistical information, accounting and tax law
interpretations, political developments, legal developments
affecting portfolio securities, technical market action, pricing
and appraisal services, credit analysis, risk measurement
analysis, performance analysis and analysis of corporate
responsibility issues. These services provide both domestic and
international perspective. Research services are received
primarily in the form of written reports, computer generated
services, telephone contacts and personal meetings with security
analysts. In addition, such services may be provided in the form
of meetings arranged with corporate and industry spokespersons,
economists, academicians and government representatives. In some
cases, research services are generated by third parties but are
provided to T. Rowe Price by or through broker-dealers.
Research services received from brokers and dealers are
supplemental to T. Rowe Price's own research effort and, when
utilized, are subject to internal analysis before being
incorporated by T. Rowe Price into its investment process. As a
practical matter, it would not be possible for T. Rowe Price's
Equity Research Division to generate all of the information
presently provided by brokers and dealers. T. Rowe Price pays
cash for certain research services received from external
sources. T. Rowe Price also PAGE 34
allocates brokerage for research services which are available for
cash. While receipt of research services from brokerage firms
has not reduced T. Rowe Price's normal research activities, the
expenses of T. Rowe Price could be materially increased if it
attempted to generate such additional information through its own
staff. To the extent that research services of value are
provided by brokers or dealers, T. Rowe Price may be relieved of
expenses which it might otherwise bear.
T. Rowe Price has a policy of not allocating brokerage
business in return for products or services other than brokerage
or research services. In accordance with the provisions of
Section 28(e) of the Securities Exchange Act of 1934, T. Rowe
Price may from time to time receive services and products which
serve both research and non-research functions. In such event,
T. Rowe Price makes a good faith determination of the anticipated
research and non-research use of the product or service and
allocates brokerage only with respect to the research component.
Commissions to Brokers who Furnish Research Services
Certain brokers and dealers who provide quality brokerage
and execution services also furnish research services to T. Rowe
Price. With regard to the payment of brokerage commissions, T.
Rowe Price has adopted a brokerage allocation policy embodying
the concepts of Section 28(e) of the Securities Exchange Act of
1934, which permits an investment adviser to cause an account to
pay commission rates in excess of those another broker or dealer
would have charged for effecting the same transaction, if the
adviser determines in good faith that the commission paid is
reasonable in relation to the value of the brokerage and research
services provided. The determination may be viewed in terms of
either the particular transaction involved or the overall
responsibilities of the adviser with respect to the accounts over
which it exercises investment discretion. Accordingly, while T.
Rowe Price cannot readily determine the extent to which
commission rates or net prices charged by broker-dealers reflect
the value of their research services, T. Rowe Price would expect
to assess the reasonableness of commissions in light of the total
brokerage and research services provided by each particular
broker. T. Rowe Price may receive research, as defined in
Section 28(e), in connection with selling concessions and
designations in fixed price offering in which the Funds
participate.
Internal Allocation Procedures
T. Rowe Price has a policy of not precommitting a specific
amount of business to any broker or dealer over any specific time
period. Historically, the majority of brokerage placement has
been determined by the needs of a specific transaction such as
market-making, availability of a buyer or seller of a particular
security, or specialized execution skills. However, T. Rowe
Price does have an internal brokerage allocation procedure for
that portion of its discretionary client brokerage business where
special needs do not exist, or where the business may be
allocated among several brokers or dealers which are able to meet
the needs of the transaction.
Each year, T. Rowe Price assesses the contribution of the
brokerage and research services provided by brokers or dealers,
and attempts to allocate a portion of its brokerage business in
response to these assessments. Research analysts, counselors,
various investment committees, and the Trading Department each
seek to evaluate the brokerage and research services they receive
from brokers or dealers and make judgments as to the level of
business which would recognize such services. In addition,
brokers or dealers sometimes suggest a level of business they
would like to receive in return for the various brokerage and
research services they provide. Actual brokerage
PAGE 35
received by any firm may be less than the suggested allocations
but can, and often does, exceed the suggestions, because the
total business is allocated on the basis of all the
considerations described above. In no case is a broker or dealer
excluded from receiving business from T. Rowe Price because it
has not been identified as providing research services.
Miscellaneous
T. Rowe Price's brokerage allocation policy is consistently
applied to all its fully discretionary accounts, which represent
a substantial majority of all assets under management. Research
services furnished by brokers or dealers through which T. Rowe
Price effects securities transactions may be used in servicing
all accounts (including non-Fund accounts) managed by T. Rowe
Price. Conversely, research services received from brokers or
dealers which execute transactions for the Fund are not
necessarily used by T. Rowe Price exclusively in connection with
the management of the Fund.
From time to time, orders for clients may be placed through
a computerized transaction network.
The Fund does not allocate business to any broker-dealer on
the basis of its sales of the Fund's shares. However, this does
not mean that broker-dealers who purchase Fund shares for their
clients will not receive business from the Fund.
Some of T. Rowe Price's other clients have investment
objectives and programs similar to those of the Fund. T. Rowe
Price may occasionally make recommendations to other clients
which result in their purchasing or selling securities
simultaneously with the Fund. As a result, the demand for
securities being purchased or the supply of securities being sold
may increase, and this could have an adverse effect on the price
of those securities. It is T. Rowe Price's policy not to favor
one client over another in making recommendations or in placing
orders. T. Rowe Price frequently follows the practice of
grouping orders of various clients for execution which generally
results in lower commission rates being attained. In certain
cases, where the aggregate order is executed in a series of
transactions at various prices on a given day, each participating
client's proportionate share of such order reflects the average
price paid or received with respect to the total order. T. Rowe
Price has established a general investment policy that it will
ordinarily not make additional purchases of a common stock of a
company for its clients (including the T. Rowe Price Funds) if,
as a result of such purchases, 10% or more of the outstanding
common stock of such company would be held by its clients in the
aggregate.
Trade Allocation Policies
T. Rowe Price has developed written trade allocation
guidelines for its Equity, Municipal, and Taxable Fixed Income
Trading Desks. Generally, when the amount of securities
available in a public offering or the secondary market is
insufficient to satisfy the volume or price requirements for the
participating client portfolios, the guidelines require a pro
rata allocation based upon the amounts initially requested by
each portfolio manager. In allocating trades made on combined
basis, the Trading Desks seek to achieve the same net unit price
of the securities for each participating client. Because a pro
rata allocation may not always adequately accommodate all facts
and circumstances, the guidelines provide for exceptions to
allocate trades on an adjusted, pro rata basis. Examples of
where adjustments may be made include: (i) reallocations to
recognize the efforts of a portfolio manager in negotiating a
transaction or a private placement; (ii) reallocations to
eliminate deminimis positions; (iii) priority for accounts with
specialized
PAGE 36
investment policies and objectives; and (iv) reallocations in
light of a participating portfolio's characteristics (e.g.,
industry or issuer concentration, duration, and credit exposure).
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 Holding and JFG also may be used.
Although it does not believe that the Fund's use of these brokers
would be subject to Section 17(e) of the Investment Company Act
of 1940, the Board of Directors/Trustees of the Fund has agreed
that the procedures set forth in Rule 17e-1 under that Act will
be followed when using such brokers.
PRICING OF SECURITIES
Equity securities listed or regularly traded on a securities
exchange are valued at the last quoted sales price on the day the
valuations are made. A security which is listed or traded on
more than one exchange is valued at the quotation on the exchange
determined to be the primary market for such security. Listed
securities that are not traded on a particular day and
PAGE 37
securities regularly traded in the Over-The-Counter market are
valued at the mean of the latest bid and asked prices. Other
equity securities are valued at a price within the limits of the
latest bid and asked prices deemed by the Board of Directors, or
by persons delegated by the Board, best to reflect fair value.
Debt securities are generally traded in the over-the-counter
market and are valued at a price deemed best to reflect fair
value as quoted by dealers who make markets in these securities
or by an independent pricing service. Short-term debt securities
are valued at their cost in local currency which, when combined
with accrued interest, approximates fair value.
For 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 the insurance company separate account elects
otherwise, the fourth quarter dividend and capital gain
distribution 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 38
TAX STATUS
The Fund intends to qualify as a "regulated investment
company" under Subchapter M of the Internal Revenue Code of 1986,
as amended ("Code") and also intends to diversify its assets in
accordance with regulations under Code Section 817(h).
In 1987, the Treasury Department indicated that it may issue
regulations addressing the circumstances in which a
policyholder's control of the investments of the insurance
company separate account would result in the policyholder being
treated as the owner of such assets. Although there is no
present indication that such regulations will be issued, their
adoption could alter the tax treatment of the policyholder,
separate account or insurance company.
For tax purposes, the Fund must declare dividends by
December 31 of each year 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 within 12 months
100% of ordinary income and capital gains as of December 31 to
avoid a federal income tax. In certain circumstances, the Fund
may not be required to comply with the excise tax distribution
requirements. It does not make any difference whether dividends
and capital gain distributions are paid in cash or in additional
shares.
At the time a shareholder acquires Fund shares, the Fund's
net asset value may reflect undistributed income, capital gains
or net unrealized appreciation of securities held by the Fund
which may be subsequently distributed as either dividends or
capital gain distributions.
If, in any taxable year, the Fund should not qualify as a
regulated investment company under the Code: (i) the Fund would
be taxed at normal corporate rates on the entire amount of its
taxable income, if any, without deduction for dividends or other
distributions to shareholders; and (ii) the Fund's distributions
to the extent made out of the Fund's current or accumulated
earnings and profits would be treated as ordinary dividends by
shareholders (regardless of whether they would otherwise have
been considered capital gain dividends), and (iii) the separate
accounts investing in the Fund may fail to satisfy the
requirements of Code Section 817(h) which in turn could adversely
affect the tax status of life insurance and annuity contracts
with premiums invested in the affected separate accounts.
To the extent the Fund invests in foreign securities, the
following would apply:
Passive Foreign Investment Companies
The Fund may purchase the securities of certain foreign
investment funds or trusts called passive foreign investment
companies. In addition to bearing their proportionate share of
the fund's expenses (management fees and operating expenses)
shareholders will also indirectly bear similar expenses of such
funds. Capital gains on the sale of such holdings will be deemed
to be ordinary income regardless of how long the Fund holds its
investment. In addition, the Fund may be subject to corporate
income tax and an interest charge on certain dividends and
capital gains earned from these investments, regardless of
whether such income and gains are distributed to shareholders.
In accordance with tax regulations, the Fund intends to
treat these securities as sold on the last day of the Fund's
fiscal year and recognize any gains for tax purposes at that
time; losses will not be recognized. Such gains will be
considered ordinary income which the Fund will be required to
PAGE 39
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, or
to the extent such dividend has already been paid, it may be
classified as a return of capital. Adjustments, to reflect these
gains and losses will be made at the end of the Fund's taxable
year.
INVESTMENT PERFORMANCE
Total Return Performance
The Fund's calculation of total return performance will
include 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 to be 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.
Outside Sources of Information
From time to time, in reports and promotional literature:
(1) the Fund's total return performance or P/E ratio may be
compared to any one or combination of the following: (i) the
Standard & Poor's 500 Stock Index and Dow Jones Industrial
Average so that you may compare the Fund's results with those of
a group of unmanaged securities widely regarded by investors as
representative of the 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
PAGE 40
surveys (e.g. S&P Industry Surveys) in order to evaluate the
Fund's historical performance or current or potential value with
respect to the particular industry or sector.
Other Features and Benefits
The Fund is a member of the T. Rowe Price Family of Funds
and may help investors achieve various long-term investment
goals, such as investing money for retirement, saving for a down
payment on a home, or paying college costs. To explain how the
Fund could be used to assist investors in planning for 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; Tax
Considerations for Investors discusses the tax advantages of
annuities and municipal bonds and how to access whether they are
suitable for your portfolio, reviews pros and cons of placing
assets in a gift to minors account and summarizes the benefits
and types of tax-deferred retirement plans currently available;
the Personal Strategy Planner simplifies investment decision
making by helping investors define personal financial goals,
establish length of time the investor intends to invest,
determine risk "comfort zone" and select diversified investment
mix; and the How to Choose a Bond Fund guide which discusses how
to choose an appropriate bond fund for your portfolio. 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 below 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 below.
PAGE 41
Historical Returns for Different Investments
Annualized returns for periods ended 12/31/95
50 years 20 years 10 years 5 years
Small-Company Stocks 13.8% 19.6% 11.9% 24.5%
Large-Company Stocks 11.9 14.6 14.8 16.6
Foreign Stocks N/A 15.1 13.9 9.7
Long-Term Corporate Bonds 5.7 10.5 11.2 12.1
Intermediate-Term U.S.
Gov't. Bonds 5.9 9.7 9.1 8.8
Treasury Bills 4.8 7.3 5.5 4.3
U.S. Inflation 4.4 5.2 3.5 2.8
Sources: Ibbotson Associates, Morgan Stanley. Foreign stocks
reflect performance of The Morgan Stanley Capital International
EAFE Index, which includes some 1,000 companies representing the
stock markets of Europe, Australia, New Zealand, and the Far
East. This chart is for illustrative purposes only and should
not be considered as performance for, or the annualized return
of, any T. Rowe Price Fund. Past performance does not guarantee
future results.
Also included will be various portfolios demonstrating how
these historical indices would have performed in various
combinations over a specified time period in terms of return. An
example of this is shown on the next page.
Performance of Retirement Portfolios*
Asset Mix Average Annualized Value
Returns 20 Years of
Ended 12/31/95 $10,000
Investment
After Period
________________ __________________ ____________
Nominal Real BestWorst
Portfolio Growth IncomeSafety ReturnReturn** YearYear
I. Low
Risk 40% 40% 20% 11.8% 6.5% 24.9% 0.1% $ 92,675
II. Moderate
Risk 60% 30% 10% 13.1% 7.9% 29.1% -1.8%$116,826
III. High
Risk 80% 20% 0% 14.3% 9.1% 33.4% -5.2%$145,611
Source: T. Rowe Price Associates; data supplied by Lehman
Brothers, Wilshire Associates and Ibbotson Associates.
PAGE 42
* Based on actual performance for the 20 years ended 1995 of
stocks (85% Wilshire 5000 and 15% Europe, Australia, Far
East [EAFE] Index), bonds (Lehman Brothers Aggregate Bond
Index from 1976-95 and 30-day Treasury bills from January
1976 through December 1995). Past performance does not
guarantee future results. Figures include changes in
principal value and reinvested dividends and assume the same
asset mix is maintained each year. This exhibit is for
illustrative purposes only and is not representative of the
performance of any T. Rowe Price fund.
** Based on inflation rate of 5.2% for the 20-year period ended
12/31/95.
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.
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
four series, T. Rowe Price Equity Income Portfolio, T. Rowe Price
Personal Strategy Balanced Portfolio and T. Rowe Price New
America Growth Portfolio all established in 1994, and the T. Rowe
Price Mid-Cap Growth Portfolio established in 1996. Each series
represents a separate class of the Corporation's shares and has
different objectives and investment policies. The T. Rowe Price
Equity Income Portfolio, T. Rowe Price Personal Strategy Balanced
Portfolio, and the T. Rowe Price New America Growth Portfolio are
each 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
PAGE 43
right of class vote unless and to the extent that such a right
might be construed to exist under Maryland law. The Charter
contains no provision entitling the holders of the present class
of capital stock to a vote as a class on any matter. Accordingly,
the preferences, rights, and other characteristics attaching to
any class of shares, including the present class of capital
stock, might be altered or eliminated, or the class might be
combined with another class or classes, by action approved by the
vote of the holders of a majority of all the shares of all
classes entitled to be voted on the proposal, without any
additional right to vote as a class by the holders of the capital
stock or of another affected class or classes.
The various insurance companies own the outstanding shares
of the Fund in their separate accounts. These separate accounts
are registered as investment companies under the 1940 Act or are
excluded from registration. Each insurance company, as the
Shareholder, is entitled to one vote for each full share held
(and fractional votes for fractional shares held). Under the
current laws the insurance companies must vote the shares held in
registered separate accounts in accordance with voting
instructions received from variable Contract Holders or
Participants. Fund shares for which Contract Holders or
Participants are entitled to give voting instructions, but as to
which no voting instructions are received, and shares owned by
the insurance companies or affiliated companies in the separate
accounts, will be voted in proportion to the shares for which
voting instructions have been received.
There will normally be no meetings of shareholders for the
purpose of electing directors unless and until such time as less
than a majority of the directors holding office have been elected
by shareholders, at which time the directors then in office will
call a shareholders' meeting for the election of directors.
Except as set forth above, the directors shall continue to hold
office and may appoint successor directors. Voting rights are
not cumulative, so that the holders of more than 50% of the
shares voting in the election of directors can, if they choose to
do so, elect all the directors of the Fund, in which event the
holders of the remaining shares will be unable to elect any
person as a director. As set forth in the By-Laws of the
Corporation, a special meeting of shareholders of the Corporation
shall be called by the Secretary of the Corporation on the
written request of shareholders entitled to cast at least 10% of
all the votes of the Corporation entitled to be cast at such
meeting. Shareholders requesting such a meeting must pay to the
Corporation the reasonably estimated costs of preparing and
mailing the notice of the meeting. The Corporation, however,
will otherwise assist the shareholders seeking to hold the
special meeting in communicating to the other shareholders of the
Corporation to the extent required by Section 16(c) of the
Investment Company Act of 1940.
FEDERAL AND STATE REGISTRATION OF SHARES
The Fund's shares are registered for sale under the
Securities Act of 1933, and the Fund or its shares register with
state insurance divisions that require registration, as well as
the District of Columbia and Puerto Rico.
LEGAL COUNSEL
Shereff, Friedman, Hoffman & Goodman, LLP, whose address is
919 Third Avenue, New York, New York 10022, is legal counsel to
the Fund.
PAGE 44
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP, 7 St. Paul Street, Suite 1700,
Baltimore, Maryland 21202, are independent accountants to the
Fund.
