PAGE 1
Combined Prospectus for the T. Rowe Price No-Load Variable
Annuity, dated May 1, 1997, should be inserted here.
Prospectus
May 1, 1997
The T. Rowe Price No-Load Variable Annuity
Portfolios' Prospectus
T. Rowe Price Fixed Income Series, Inc.
Prime Reserve Portfolio
Limited-Term Bond Portfolio
T. Rowe Price Equity Series, Inc.
Personal Strategy Balanced Portfolio
Equity Income Portfolio
Mid-Cap Growth Portfolio
New America Growth Portfolio
T. Rowe Price International Series, Inc.
International Stock Portfolio
May 1, 1997
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THIS PROSPECTUS CONTAINS INFORMATION YOU SHOULD KNOW BEFORE
INVESTING. PLEASE KEEP IT FOR FUTURE REFERENCE. A STATEMENT OF
ADDITIONAL INFORMATION ABOUT THE FUNDS, DATED MAY 1, 1997, HAS
BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION AND IS
INCORPORATED BY REFERENCE IN THIS PROSPECTUS. TO OBTAIN A FREE
COPY, CONTACT 1-800-469-6587.
Facts at a Glance
Investment Goal
Tax-deferred growth of capital over time through portfolios
representing a broad range of investment approaches from
conservative to aggressive. There is no assurance the portfolios
will achieve their goals.
Strategy
Prime Reserve Portfolio
Invests principally in the highest-quality, U.S.
dollar-denominated money market securities. Average maturity
will not exceed 90 days. The fund is managed to maintain a
stable share price of $1.00. Risk/Reward: Greater safety and
liquidity than can be found in longer-term, fixed income funds,
generally accompanied by a lower level of income.
Limited-Term Bond Portfolio
Invests primarily in investment-grade, corporate bonds. Average
effective maturity will range between one and five years.
Risk/Reward: Moderate income level and share price fluctuation.
Personal Strategy Balanced Portfolio
To pursue both capital appreciation and income, the fund will
invest approximately 50% to 70% of assets in stocks with the
remainder invested in bonds and money market securities.
Risk/Reward: Higher risk and return than a bond fund but lower
risk and return than a stock fund. The fund's share price may
decline causing a loss.
Equity Income Portfolio
To invest primarily in dividend-paying common stocks,
particularly of established companies, with favorable prospects
for both increasing dividends and capital appreciation.
Risk/Reward: Conservative stock fund. Lower risk than a fund
focusing on growth stocks but greater risk than a bond fund. The
fund's share price may decline, causing a loss.
Mid-Cap Growth Portfolio
The fund will focus on companies with superior earnings growth
potential that are no longer considered new or emerging, but are
not large. 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, 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.
New America Growth Portfolio
To invest in the stocks of large and small service companies
expected by T. Rowe Price to show superior earnings growth. The
fund may also invest up to 25% of total assets in
nonservice-related growth companies. Total return will consist
primarily of capital appreciation or depreciation. Risk/Reward:
The potential to provide significant growth of capital over time
with above-average volatility. The fund's share price may
decline, causing a loss.
International Stock Portfolio
Invests worldwide primarily in well-established, non-U.S.
companies. Risk/Reward: The fund's share price will fluctuate
with changes in market, economic, and foreign currency exchange
conditions. High potential risk and reward.
Investor Profile
Those seeking the tax advantages and insurance benefits of the
T. Rowe Price No-Load Variable Annuity, whose risk tolerance and
investment goals are suited to one or more of the five
portfolios.
Investment Manager
The Prime Reserve, Limited-Term Bond, Personal Strategy
Balanced, Equity Income, Mid-Cap Growth, and New America Growth
Portfolios are managed by T. Rowe Price Associates, Inc. ("T.
Rowe Price"). The International Stock Portfolio is managed by
Rowe Price-Fleming International, Inc. ("Price-Fleming"), a
joint venture established in 1979 between T. Rowe Price
Associates, Inc. and Robert Fleming Holdings, Limited.
Table of Contents
T. Rowe Price
Fixed Income Series, Inc.
Equity Series, Inc.
International Series, Inc.
May 1, 1997
Prospectus
About the Funds
Financial Highlights. . . . . . . . . . . . . 4
Fund, Market, and Risk Characteristics. . . . 5
Prime Reserve Portfolio. . . . . . . . . . 5
Limited-Term Bond Portfolio. . . . . . . . 7
Personal Strategy Balanced Portfolio . . . 11
Equity Income Portfolio. . . . . . . . . . 13
Mid-Cap Growth Portfolio . . . . . . . . . 15
New America Growth Portfolio . . . . . . . 17
International Stock Portfolio. . . . . . . 19
About Your Account
Pricing Shares and Receiving Sale Proceeds. . 23
Dividends and Distributions . . . . . . . . . 24
More About the Funds
Organization and Management . . . . . . . . . 24
Understanding Performance Information . . . . 29
Investment Policies and Practices . . . . . . 30
Prime Reserve Portfolio. . . . . . . . . . 30
Limited-Term Bond Portfolio. . . . . . . . 32
Personal Strategy Balanced Portfolio . . . 38
Equity Income Portfolio. . . . . . . . . . 45
Mid-Cap Growth Portfolio . . . . . . . . . 48
New America Growth Portfolio . . . . . . . 51
International Stock Portfolio. . . . . . . 54
About the Funds
Financial Highlights
Table 1, which provides information about each fund's financial
history, is based on a single share outstanding throughout each
fiscal year. Each fund's table is part of the financial
statements included in each annual report which is incorporated
by reference into the Statement of Additional Information
(available upon request). The financial statements in the annual
report have been audited by Price Waterhouse LLP, independent
accountants.
<TABLE>
<CAPTION>
_______________________________________________________________________________________
Income From Investment Activities Less Distributions
Net
Realized
Net and Total
Asset Net Unrealized From Net
Value, Invest- Gain (Loss) Invest- Invest- Net
Begin- ment on ment ment Realized Total
Period ning of Income Invest- Activi- Income Gain Distri-
Ended Period (Loss) ments ties (Loss) (Loss) butions
_______________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C> <C>
_______________________________________________________________________________________
Limited-Term
Bond Portfolio
1994a $5.00 $0.21 $(0.08) $0.13 $(0.21) - $(0.21)
1995 4.92 0.33 0.14 0.47 (0.33) - (0.33)
1996 5.06 0.29 (0.13) 0.16 (0.29) - (0.29)
Equity Income
Portfolio
1994b $10.00 $0.30 $0.41 $0.71 $(0.29) - $(0.29)
1995 10.42 0.44 3.05 3.49 (0.44) $(0.26) (0.70)
1996 13.21 0.42 2.13 2.55 (0.42) (0.08) (0.50)
New America
Growth Portfolio
1994b $10.00 $0.01 $0.09 $0.10 - - -
1995 10.10 0.03 5.12 5.15 $(0.02) - $(0.02)
1996 15.23 0.04 2.94 2.98 (0.04) $(0.50) (0.54)
Personal Strategy
Balanced Portfolio
1995c $10.00 $0.42 $2.41 $2.83 $(0.40) - $(0.40)
1996 12.43 0.41 1.32 1.73 (0.41) $(0.31) (0.72)
International
Stock Portfolio
1994b $10.00 $0.06 $0.12 d $0.18 - - -
1995 10.18 0.07 1.06 1.13 $(0.05) - $(0.05)
1996 11.26 0.09 1.55 1.64 (0.17) $(0.09) (0.26)
_______________________________________________________________________________________
<CAPTION>
_______________________________________________________________________________________
Net Asset Returns, Ratios, and Supplemental Data
Value
Ratio of
Net Total Net
Asset Return Invest- Average
Value, (Includes Net Ratio of ment Port- Commis-
End Rein- Assets Expenses Income to folio sion
of vested ($ thou- to Average Average Turnover Rate
Period Dividends) sands) Net Assets Net Assets Rate Paid
_______________________________________________________________________________________
<C> <C> <C> <C> <C> <C> <C>
_______________________________________________________________________________________
$4.92 2.62% $2,081 0.70%e 6.63%e 146.0%e -
5.06 9.88% 3,966 0.70% 6.60% 73.7% -
4.93 3.26% 12,312 0.70% 5.83% 97.7% -
$10.42 7.15% $2,191 0.85%e 3.88%e 21.3%e -
13.21 34.76% 14,658 0.85% 3.61% 10.1% -
15.26 19.56 103,751 0.85% 2.94% 17.4% $0.0388
$10.10 1.00% $2,028 0.85%e 0.15%e 81.0%e -
15.23 51.10% 12,304 0.85% 0.23% 54.5% -
17.67 20.09% 60,241 0.85% 0.18% 27.2% $0.0996
$12.43 28.66% $5,625 0.90% 3.69% 39.3% -
13.44 14.21% 33,263 0.90% 3.33% 51.7% $0.0433
$10.18 1.80% $9,095 1.05%e 1.50%e 4.6%e -
11.26 11.18% 51,661 1.05% 1.47% 17.4% -
12.64 14.70% 210,746 1.05% 1.22% 9.7% $0.0014
_______________________________________________________________________________________
<FN>
a From May 31, 1994 (commencement of operations) to December 31, 1994.
b From March 31, 1994 (commencement of operations) to December 31, 1994.
c From December 30, 1994 (commencement of operations) to December 31, 1995.
d The amount presented is calculated pursuant to a methodology prescribed by the
Securities and Exchange Commission for a share outstanding throughout the period.
This amount is inconsistent with the fund's aggregate gains and losses because of
the timing of sales and redemptions of fund shares in relation to fluctuating market
values for the investment portfolio.
e Annualized.
Note: Total returns do not include charges imposed by your insurance company's separate
account. If these were included, performance would have been lower.
_______________________________________________________________________________________
</FN>
Table 1
</TABLE>
Fund, Market, and Risk Characteristics: What to Expect
To help you decide how to allocate your investments within the
T. Rowe Price No-Load Variable Annuity, this section takes a
closer look at each portfolio and the markets in which each
invests. Your investment in any of the portfolios should not
represent your complete investment program nor be used to play
short-term market swings. The share prices of all the portfolios
may decline, causing a loss.
Prime Reserve Portfolio
What is the fund's objective?
There is no assurance the fund will be able to maintain a stable
net asset value of $1.00 per share.
The fund's objectives are preservation of capital, liquidity,
and, consistent with these, the highest possible current income
through investments primarily in high-quality, money market
securities.
What is the fund's investment program?
The fund invests at least 95% of its total assets in prime money
market instruments, that is, securities receiving the highest
credit rating assigned by at least two established rating
agencies, by one rating agency if the security is rated by only
one, or, if unrated, the equivalent rating as established by T.
Rowe Price. The fund's dollar-weighted average maturity will not
exceed 90 days. It will not purchase any security with a
maturity of more than 13 months. Its yield will fluctuate in
response to changes in interest rates, but the share price is
managed to remain stable at $1.00. Unlike most bank accounts or
certificates of deposit, the fund is not insured or guaranteed
by the U.S. government.
What is a money market fund?
A money market fund is a pool of assets invested in U.S.
dollar-denominated, short-term debt obligations with fixed or
floating rates of interest and maturities generally less than 13
months. Issuers can include the U.S. government and its
agencies, domestic and foreign banks and other corporations, and
municipalities. Money funds can be taxable or tax-exempt,
depending on their investment program. Because of the high
degree of safety they provide, money market funds typically
offer the lowest return potential of any type of mutual fund.
What are the main types of money market securities the fund can
invest in?
For further details on the fund's investment program and
practices, please see the section entitled Investment Policies
and Practices.
o Commercial paper Unsecured promissory notes that
corporations typically issue to finance current operations
and other expenditures.
o Treasury bills Debt obligations sold at discount and repaid
at face value by the U.S. Treasury. Bills mature in one
year or less and are backed by the full faith and credit of
the U.S. government.
o Certificates of deposit Receipts for funds deposited at
banks that guarantee a fixed interest rate over a specified
time period.
o Repurchase agreements Contracts, usually involving U.S.
government securities, that require one party to repurchase
securities at a fixed price on a designated date.
o Banker's acceptances Bank-issued commitments to pay for
merchandise sold in the import/export market.
o Agency notes Debt obligations of agencies sponsored by the
U.S. government that are not backed by the full faith and
credit of the United States.
o Medium-term notes Unsecured corporate debt obligations that
are continuously offered in a broad range of maturities and
structures.
o Bank notes Unsecured obligations of a bank that rank on an
equal basis with other kinds of deposits but do not carry
FDIC insurance.
What are the main risks of investing in money market funds?
Since they are managed to maintain a $1.00 share price, money
market funds should have little risk of principal loss. However,
the potential for realizing a loss of principal in the fund
could derive from:
o Credit risk The chance that any of the fund's holdings will
have its credit rating downgraded or will default (fail to
make scheduled interest or principal payments), potentially
reducing the fund's income level and share price.
Regulations require that 95% of the holdings in money
market funds be rated in the highest credit category, and
that the remaining 5% be rated no lower than the second
highest credit category.
o Interest rate or market risk The decline in the prices of
fixed income securities and funds that may accompany a rise
in the overall level of interest rates. A sharp and
unexpected rise in interest rates could cause a money
fund's price to drop below a dollar. However, the extremely
short maturity of securities held in money market
portfolios-a means of achieving an overall fund objective
of principal safety-reduces their potential for price
fluctuation.
How does the portfolio manager try to reduce risk?
Consistent with the fund's objective, the portfolio manager
actively seeks to reduce risk and increase total return. Risk
management tools include:
o Diversification of assets to reduce the impact of a single
holding on the fund's net asset value.
o Thorough credit research by our own analysts.
o Maturity adjustments to reflect the fund manager's interest
rate outlook.
What are derivatives and can the fund invest in them?
The term derivative is used to describe financial instruments
whose value is derived from an underlying security (e.g., a
stock or bond) or a market benchmark (e.g., an interest rate
index). Many types of investments representing a wide range of
potential risks and rewards fall under the "derivatives"
umbrella-from conventional instruments such as callable bonds,
futures, and options, to more exotic investments such as
stripped mortgage securities and structured notes. While the
term "derivative" has only recently become widely known among
the investing public, derivatives have in fact been employed by
investment managers for many years.
The fund does not invest in high-risk, highly leveraged
derivatives, and it will invest in derivatives only if the
expected risks and rewards are consistent with the fund's
objective, policies, and overall risk profile as described in
this prospectus.
You may want to review some fundamentals of money market
securities.
Is a fund's yield fixed or will it vary?
It will vary. Yield is calculated every day by dividing the
fund's net income per share, expressed at annual rates, by the
share price. Since income in the fund will fluctuate as the
short-term securities in its portfolio mature and the proceeds
are reinvested, its yield will vary.
Is the fund's "yield" the same thing as its "total return"?
Yes. The total return reported for the fund is the result of
reinvested distributions (income and capital gains) and the
change in share price for a given time period. Since money funds
are managed to maintain a stable share price, their yield and
total return should be the same. Of course, there is no
guarantee a money fund will maintain a $1.00 share price.
What is "credit quality" and how does it affect a money market
fund's yield?
Credit quality refers to a borrower's expected ability to make
all required interest and principal payments in a timely manner.
Because highly rated issuers represent less risk, they can
borrow at lower interest rates than less creditworthy issuers.
Securities backed by the full faith and credit of the U.S.
government are regarded as free of credit risk. Among money
market securities, Treasury bills generally carry lower yields
than other instruments of comparable maturity.
What is meant by a money market fund's "maturity"?
Every money market instrument has a stated maturity date when
the issuer must repay the entire principal to the investor. The
fund has no maturity in the strict sense of the word, but does
have a dollar-weighted average maturity, expressed in days. This
number is an average of the maturities of the underlying
instruments, with each maturity "weighted" by the percentage of
fund assets it represents.
Do money market securities react to changes in interest rates?
Yes. As interest rates change, the prices of money market
securities fluctuate, but changes are usually small because of
their very short maturities. Investments are typically held
until maturity in a money fund to help it maintain a $1.00 share
price.
An investment in the fund should help you meet your individual
investment goals for principal stability, liquidity, and income,
but should not represent your complete investment program.
How can I decide if the fund is appropriate for me?
Review your own financial objectives, time horizon, and risk
tolerance. For example, a money fund is designed to provide
principal stability, which makes it a good choice for money you
may need for occasional or unexpected expenses and for money
awaiting investment in longer-term bond or stock funds.
Is there other information I need to review before making a
decision?
Be sure to read Investment Policies and Practices in Section 3,
which discusses the principal types of portfolio securities that
the fund may purchase as well as the types of management
practices that the fund may use.
Limited-Term Bond Portfolio
What is the fund's objective and investment program?
The fund's objective is to provide a high level of income
consistent with moderate fluctuation in principal value. The
fund will invest at least 65% of total assets in short- and
intermediate-term, investment-grade bonds. There are no maturity
limitations on individual securities purchased, but the fund's
dollar-weighted average effective maturity will not exceed five
years. Targeting effective maturity provides additional
flexibility in portfolio management but, all else being equal,
could result in higher volatility than would be true of a fund
targeting a stated maturity or maturity range.
At least 90% of the fund's portfolio will be invested in
securities rated in the four highest credit categories
(investment-grade securities) by a nationally recognized rating
agency or, if unrated, of equivalent quality as determined by T.
Rowe Price. Investment-grade securities include a range of
securities from the highest rated to medium quality (BBB).
Securities in the BBB category are more susceptible to adverse
economic conditions or changing circumstances and securities at
the lower end of the BBB category may have certain speculative
characteristics. In an effort to enhance yield, up to 10% of
assets can be invested in below investment-grade securities,
commonly referred to as "junk" bonds, including those with the
lowest rating. The fund's income level should be higher than the
money fund's, but its share price will vary.
How does the fund's credit quality relate to its investment
objective?
To secure a higher income with moderate principal fluctuation,
the fund invests at least 90% of its assets in investment-grade
securities, which provide a wider range of income opportunities
with some additional credit risk. The balance may consist of
securities rated below investment grade, including those with
the lowest rating. Like all portfolio holdings, these securities
are subject to rigorous credit research conducted by T. Rowe
Price analysts. (For further discussion, please see Investment
Policies and Practices-High-Yield Investing.)
What are the most important influences on a fund's performance?
The share price and yield of the funds will fluctuate with
changing market conditions and interest rate levels. When you
sell your shares, you may lose money.
Performance (total return) is determined by the change in the
fund's share price and income level over a given period. Both
components are affected by changes in interest rates.
The fund's share price will generally move in the opposite
direction of interest rates. For example, as interest rates
rise, share price will likely decline. Rising rates provide the
opportunity for the fund's income to increase, but it is
unlikely that the higher income by itself will entirely offset
the fall in price.
The maturity and type of securities in the fund's portfolio
determine just how much the share price rises or falls when
rates change. Generally, when rates fall, long-term securities
rise more in price than short-term securities, and vice versa.
Mortgage-backed securities usually follow this pattern but,
because of prepayments, would not be expected to rise as much in
price as Treasury or corporate bonds.
You will find more information about the types of securities the
fund may own and how they may perform further on in this section
and in Section 3.
What are the main risks of investing in the fund?
o Interest rate or market risk The decline in the prices of
fixed income securities and funds that may accompany a rise
in the overall level of interest rates (please see Table
2).
o Credit risk The chance that any of the fund's holdings will
have its credit rating downgraded or will default (fail to
make scheduled interest or principal payments), potentially
reducing the fund's income level and share price.
o Currency risk The possibility that a fund's foreign
holdings will be adversely affected by fluctuations in
currency markets.
How does the portfolio manager try to reduce risk?
Consistent with the fund's objective, the portfolio manager
actively seeks to reduce risk and increase total return. Risk
management tools include:
o Diversification of assets to reduce the impact of a single
holding on the fund's net asset value.
o Thorough credit research by our own analysts.
o Adjustment of fund duration to try to reduce the negative
impact of rising interest rates or take advantage of the
benefits of falling rates.
What are derivatives and can the fund invest in them?
The term derivative is used to describe financial instruments
whose value is derived from an underlying security (e.g., a
stock or bond) or a market benchmark (e.g., an interest rate
index). Many types of investments representing a wide range of
potential risks and rewards fall under the "derivatives"
umbrella-from conventional instruments such as callable bonds,
futures and options, to more exotic investments such as stripped
mortgage securities and structured notes. While it was only
recently that the term derivative has become widely known among
the investing public, derivatives have in fact been employed by
investment managers for many years.
The fund will invest in derivatives only if the expected risks
and rewards are consistent with its objectives, policies, and
overall risk profile as described in this prospectus. The fund
will limit its use of derivatives to situations in which they
may enable the fund to accomplish the following: increase yield;
hedge against a decline in principal value; invest in eligible
asset classes with greater efficiency and lower cost than is
possible through direct investment; or to adjust the fund's
duration.
The fund will not invest in any high-risk, highly leveraged
derivative instrument that is expected to cause the price
volatility of the portfolio to be meaningfully different from
that of an intermediate-term investment-grade bond.
Before choosing a fund, you may find it helpful to review some
fundamentals of fixed income investing.
Is a fund's yield fixed or will it vary?
It will vary. The yield is calculated every day by dividing a
fund's net income per share, expressed at annual rates, by the
share price. Since both income and share price will fluctuate,
a fund's yield will also vary.
Is a fund's "yield" the same thing as the "total return"?
Not for bond funds. The total return reported for a fund is the
result of reinvested distributions (income and capital gains)
and the change in share price for a given time period. Income is
always a positive contributor to total return and can enhance a
rise in share price or serve as an offset to a drop in share
price. Since money funds are managed to maintain a stable share
price, their yield and total return should be the same.
What is "credit quality" and how does it affect a fund's yield?
Credit quality refers to a bond issuer's expected ability to
make all required interest and principal payments in a timely
manner. Because highly rated issuers represent less risk, they
can borrow at lower interest rates than less creditworthy
issuers. Therefore, a fund investing in high-quality securities
should have a lower yield than an otherwise comparable fund
investing in lower credit-quality securities.
What is meant by a bond fund's "maturity"?
Every bond has a stated maturity date when the issuer must repay
the bond's entire principal value to the investor. However, many
corporate and municipal bonds are "callable," meaning their
principal can be repaid before their stated maturity dates on
(or after) specified call dates. Bonds are most likely to be
called when interest rates are falling, because the issuer wants
to refinance at a lower rate. In such an environment, a bond's
"effective maturity" is usually its nearest call date. For
example, the effective maturity of mortgage-backed bonds is
determined by the rate at which homeowners pay down the
principal on the underlying mortgages.
A bond mutual fund has no maturity in the strict sense of the
word, but it does have an average maturity and an average
effective maturity. This number is an average of the stated or
effective maturities of the underlying bonds, with each bond's
maturity "weighted" by the percentage of fund assets it
represents. Funds that target effective maturities would use the
effective (rather than stated) maturities of the underlying
instruments when computing the average. Targeting effective
maturity provides additional flexibility in portfolio management
but, all else being equal, could result in higher volatility
than a fund targeting a stated maturity or maturity range.
What is a bond fund's "duration"?
Duration is a calculation that seeks to measure the price
sensitivity of a bond or a bond fund to changes in interest
rates. It measures bond price sensitivity to interest rate
changes more accurately than maturity because it takes into
account the time value of cash flows generated over the bond's
life. Future interest and principal payments are discounted to
reflect their present value and then are multiplied by the
number of years they will be received to produce a value that is
expressed in years, i.e., the duration. Effective duration takes
into account call features and sinking fund payments that may
shorten a bond's life.
Since duration can also be computed for bond funds, you can
estimate the effect of interest rates on a fund's share price.
Simply multiply the fund's duration (available for T. Rowe Price
bond funds in our shareholder reports) by an expected change in
interest rates. For example, the price of a bond fund with a
duration of five years would be expected to fall approximately
5% if rates rose by one percentage point.
How is a bond's price affected by changes in interest rates?
When interest rates rise, a bond's price usually falls, and vice
versa. In general, the longer a bond's maturity, the greater the
price increase or decrease in response to a given change in
interest rates, as shown in Table 2.
How Interest Rates Affect Bond Prices
Bond
Maturity Coupon Price per $1,000 of a Bond Face Value
if Interest Rates:
Increase Decrease
1 Point 2 Points 1 Point 2 Points
1 year 5.50% $990 $981 $1,010 $1,019
5 years 6.20 959 919 1,044 1,089
10 years 6.40 930 866 1,076 1,160
30 years 6.65 883 787 1,144 1,322
Table 2 Coupons reflect yields on Treasury securities as of
March 31, 1997. This is an illustration and does not
represent expected yields or share price changes of
any T. Rowe Price fund.
Since the average effective maturity of bonds held by the fund
is expected to be approximately five years, the fund's share
price, like the value of the underlying bonds in its portfolio
should fluctuate less than a fund which holds bonds with longer
average effective maturities.
How can I decide if the fund is appropriate for me?
Review your own financial objectives, time horizon, and risk
tolerance to choose a fund (or funds) suitable for your
particular needs. For example, the fund is expected to be a good
choice for investors seeking more income than provided by very
short-term investments, such as money market funds and CDs, with
less principal risk than longer-term investments. Keep in mind
that the share price of any bond fund will fluctuate. If you are
investing primarily for principal safety and liquidity, you
should consider a money market fund.
Is there other information I need to review before making a
decision?
Be sure to read Investment Policies and Practices in Section 3,
which discusses the principal types of portfolio securities that
the fund may purchase as well as the types of management
practices that the fund may use.
Personal Strategy Balanced Portfolio
The fund should not be relied upon for short-term financial
needs, nor be used to play short-term swings in the stock or
bond markets.
What is the fund's objective?
The fund's objective is to seek the highest total return over
time consistent with an emphasis on both capital appreciation
and income.
What is the fund's investment program?
The fund pursues its objective by investing in a diversified
portfolio typically consisting of approximately 60% stocks, 30%
bonds, and 10% money market securities. Under normal conditions,
allocations can vary by 10% above or below these ranges, based
on the fund manager's outlook for the economy and the financial
markets.
What are the general characteristics and risk factors of these
major asset classes?
o Stocks represent ownership in a corporation. Common stock
prices fluctuate with changes in a company's current
earnings and future prospects and with overall stock market
conditions. Stocks of many well-established corporations
offer the potential for appreciation and rising dividends.
While smaller companies usually reinvest earnings in their
own growth and, therefore, pay minimal or no dividends,
they offer the possibility of even greater appreciation if
their businesses prosper and grow.
Historically, stocks have provided higher returns over time
than bonds or money market securities and, therefore, offer
a way to invest for long-term growth of capital. In
addition, stock investments have provided the greatest
protection against the erosion of purchasing power caused
by inflation.
Share prices of all companies, even the best managed and
most profitable, can fall for any number of reasons,
ranging from lower-than-expected earnings to changes in
investor psychology. Significant trading by large
institutional investors also can lead to price declines. In
addition, if our assessment of company prospects proves
incorrect, companies that our managers and analysts expect
to do well may perform poorly. Since 1950, the U.S. stock
market has experienced 10 negative years as well as steep
drops of shorter duration. Its worst calendar quarter
returns in recent years was -22.5% in 1987's fourth
quarter. For these reasons, equity investors should have a
long-term investment horizon and be willing to wait out
bear markets.
o Bonds have two main sources of risk. Credit risk refers to
the possibility that a bond's price may fall due to a
credit downgrade or "default," i.e., the issuer failing to
make an interest or principal payment. Interest rate risk
refers to a bond's price movement in response to changes in
interest rates. When rates rise, bond prices fall, and vice
versa. Generally, the longer a bond's maturity, the greater
its potential price fluctuation.
The fund expects to invest primarily in bonds with
investment-grade credit ratings. However, the fund may also
make investments in more volatile below investment-grade
(or "junk") bonds, including bonds with the lowest rating.
Investment-grade securities include a range of securities
from the highest rated (AAA) to medium quality (BBB).
Securities in the BBB category may be more susceptible to
price declines arising from adverse economic conditions or
changing circumstances. The securities at the lower end of
the BBB category have certain speculative characteristics.
Prices of junk bonds are usually more affected by adverse
economic conditions or a deterioration in the issuer's
financial circumstances than by overall changes in interest
rates. To compensate investors for higher credit risk
exposure, such bonds usually provide higher income. Please
see High-Yield/High-Risk Investing for further information
on these investments.
o Money market securities are debt obligations issued
primarily by the U.S. government, government agencies, and
corporations. The high credit ratings, short maturities,
and high liquidity of the fund's money market securities
should minimize its credit and market risk. The fund's low
risk is usually accompanied by low potential returns
relative to other investments.
For a more detailed discussion of the fund's investments and its
risk factors, please see Investment Policies and Practices.
How does the portfolio manager try to reduce risk?
Consistent with the fund's objective, the portfolio manager
actively seeks to reduce risk and increase total return. Risk
management tools include:
o Broad diversification of assets to reduce the impact of a
single holding or asset class on the fund's share price.
o Gradual allocation changes among and within asset classes
(stocks, bonds, etc.) to take advantage of market
opportunities and changing economic conditions.
o Thorough research of stocks, bonds, and other securities by
our analysts to find the most favorable investment
opportunities.
The fund manager regularly reviews the asset allocation and may
make gradual changes, within the defined ranges, based on the
outlook for the economy, interest rates, and the financial
markets. The fund will not attempt to time short-term market
moves.
What are the advantages of diversifying across stocks, bonds,
and money market securities?
Diversification is the investment equivalent of not putting all
your eggs in one basket. While there is no guarantee, the fund's
overall volatility could be reduced by spreading investments
across several types of assets. Since prices of stocks and bonds
may respond differently to changes in economic conditions and
interest rate levels, a rise in bond prices, for example, could
help offset a fall in stock prices. Money market securities have
a stabilizing influence, since their price fluctuations are very
small. In addition, the steady income provided by bonds and
money market securities contributes positively to a portfolio's
total return, cushioning the impact of any price declines or
enhancing price increases.
Diversification among asset classes is intended to reduce the
risk associated with investing in a single asset category;
however, there is no guarantee the strategy will always result
in lower overall volatility for the fund.
For a discussion of the effects of currency exchange rate
fluctuations and other special risks of foreign investing,
please see Investment Policies and Practices.
Why include foreign securities?
The fund may invest up to 35% of its total assets in foreign
securities. Foreign stocks and bonds offer advantages to the
portfolio but also represent additional risk. The potential
advantages are extra diversification and enhanced returns. Since
foreign stock and bond markets may move somewhat independently
of their U.S. counterparts, such investments could reduce the
portfolio's short-term price fluctuations while offering a way
to participate in markets that may generate attractive returns.
Of course, if U.S. and foreign markets move in the same
direction, the positive or negative effect on the fund's share
price could be magnified. In addition, a significant decline in
foreign securities' prices would reduce the fund's return.
The fund's share price will fluctuate; when you sell your
shares, you may lose money.
How can I decide if the fund is appropriate for me?
Review your own financial objectives, investment time horizon,
and risk tolerance. Generally, the fund is intended for those
seeking a middle-of-the-road approach that emphasizes stocks for
their higher capital appreciation potential but retains a
significant income component to temper principal volatility. The
fund will invest at least 25% of its total assets in senior
fixed income securities.
If you are investing for principal safety and liquidity, you
should consider a money market fund.
Is there other information I need to review before making a
decision?
Yes. Although the fund will invest primarily in common stocks,
bonds, and money market securities, it can also make other
investments which have additional and different risks. Be sure
to read Investment Policies and Practices in Section 3, which
discusses the principal types of portfolio securities that the
fund may purchase as well as the types of management practices
that the fund may use.
Equity Income Portfolio
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 objective is to provide substantial dividend income
as well as long-term capital appreciation through investments in
common stocks of established companies.
What is the fund's investment program?
Under normal circumstances, the fund will invest at least 65% of
total assets in the common stocks of established companies
paying above-average dividends. These companies are expected to
have favorable prospects for dividend growth and capital
appreciation, as determined by T. Rowe Price.
The fund may also purchase other types of securities, for
example, foreign securities, convertible stocks and bonds, and
warrants, when considered consistent with the fund's investment
objective and program. The portfolio manager may also engage in
a variety of investment management practices, such as buying and
selling futures and options.
What are the fund's major characteristics?
T. Rowe Price believes that income can be a significant
contributor to total return over time and expects the fund's
yield to be above that of the Standard & Poor's 500 Stock Index.
The fund will tend to take a "value" approach and invest in
stocks and other securities that appear to be temporarily
undervalued by various measures, such as price/earnings ratios.
How does the fund select stocks for the portfolio?
The fund will generally consider companies with the following
characteristics:
o Established operating histories.
o Above-average current dividend yield relative to the
average yield of the S&P 500.
o Low price/earnings ratios relative to the S&P 500.
o Sound balance sheets and other financial characteristics.
o Low stock price relative to a company's underlying value as
measured by assets, earnings, cash flow, or business
franchises.
Value investors look for undervalued assets.
What is meant by a "value" investment approach?
Value investors look for undervalued assets, seeking to invest
in companies whose stock prices are low in relation to their
real worth or future prospects. By identifying companies whose
stocks are currently out of favor or misunderstood, value
investors hope to realize significant appreciation as other
investors recognize the stock's intrinsic value and the price
rises accordingly.
Finding undervalued stocks requires considerable research to
identify the particular company, analyze its underlying
financial condition and prospects, and assess the likelihood
that the stock's underlying value will be recognized by the
market and reflected in its price.
Some of the principal measures used to identify such stocks are:
o Price/earnings ratio Dividing a stock's price by its
earnings per share generates a price/earnings or P/E ratio.
A stock with a P/E that is significantly below that of its
peers, the market as a whole, or its own historical norm
may represent an attractive opportunity.
o Price/book value ratio This ratio, calculated by dividing
a stock's price by its book value per share, indicates how
a stock is priced relative to the accounting (i.e., book)
value of the company's assets. A ratio below the market,
that of its competitors, or its own historic norm could
indicate an undervalued situation.
A stock selling at $10 with a dividend of $0.50 has a 5% yield.
o Dividend yield A stock's dividend yield is found by
dividing its annual dividend by its share price. A yield
significantly above a stock's own historic norm or that of
its peers may suggest an investment opportunity.
o Price/cash flow Dividing a stock's price by the company's
cash flow per share, rather than its earnings or book
value, provides a more useful measure of value in some
cases. A ratio below that of the market or of its peers
suggests the market may be incorrectly valuing the
company's cash flow for reasons that may be temporary.
o Undervalued assets This analysis compares a company's stock
price with its underlying asset values, its projected value
in the private (as opposed to public) market, or its
expected value if the company or parts of it were sold or
liquidated.
o Restructuring opportunities The market can react favorably
to the announcement or the successful implementation of a
corporate restructuring, financial reengineering, or asset
redeployment. Such events can result in an increase in a
company's stock price. A value investor may try to
anticipate these actions and invest before the market
places an appropriate value on any actual or expected
changes.
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 fund's emphasis on stocks of established, high
dividend-paying companies, as well as its possible exposure to
fixed income securities, could limit its potential for capital
appreciation. Sharply rising interest rates could also decrease
the appeal of stocks purchased by the fund, further restraining
total return.
What are some of the fund's potential rewards?
Dividends are normally a more stable and predictable component
of total return than capital appreciation. While the price of a
company's stock can go up or down in response to earnings or to
fluctuations in the general market, dividends are usually more
reliable. Stocks paying a high level of dividend income tend to
be less volatile than those with below-average dividends.
What are some potential risks and rewards of investing in the
stock market through this fund?
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. Nevertheless,
economic growth has been punctuated by periods of stagnation and
recession. Share prices of all companies, even the best managed
and most profitable, can fall for any number of reasons, ranging
from lower-than-expected earnings to changes in investor
psychology. Significant trading by large institutional investors
also can lead to price declines. In addition, if our assessment
of company prospects proves incorrect, companies that our
managers and analysts expect to do well may perform poorly.
Since 1950, the U.S. stock market has experienced 10 negative
years as well as steep drops of shorter duration. Its worst
calendar quarter return in recent years was -22.5% in 1987's
fourth quarter.
Equity investors should have a long-term investment horizon and
be willing to wait out bear markets.
How can I decide if the fund is appropriate for me?
Consider your investment goals, your time horizon for achieving
them, and your tolerance for risk. If you can accept the price
fluctuations inherent in stock investing in an effort to achieve
income and capital appreciation, the fund could be an
appropriate part of your overall investment strategy.
Is there other information I need to review before making a
decision?
Be sure to read Investment Policies and Practices in Section 3,
which discusses the principal types of portfolio securities that
the fund may purchase as well as the types of management
practices that the fund may use.
Mid-Cap Growth Portfolio
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
between $300 million and $5 billion. Mid-cap growth companies
are no longer considered new or emerging, but they are not
large. 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.
Does the fund only invest in mid-cap stocks?
Most of the stocks purchased by the fund will be in the mid-cap
size range outlined above. However, the fund will not
automatically sell a stock just because the company's market cap
has grown beyond the $5 billion upper limit, and such positions
may be increased on occasion through additional purchases.
What is meant by a "growth" investment approach?
Growth investors look for companies with above-average earnings
gains.
Sixty years ago, Thomas Rowe Price, Jr. 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.
What are some of the fund's potential risks?
The fund's share price will fluctuate; when you sell your
shares, you may lose money.
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 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.
What are some potential risks and rewards of investing in the
stock market through this fund?
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. Nevertheless,
economic growth has been punctuated by periods of stagnation and
recession. Share prices of all companies, even the best managed
and most profitable, can fall for any number of reasons, ranging
from lower-than-expected earnings to changes in investor
psychology. Significant trading by large institutional investors
also can lead to price declines. In addition, if our assessment
of company prospects proves incorrect, companies that our
managers and analysts expect to do well may perform poorly.
Since 1950, the U.S. stock market has experienced 10 negative
years as well as steep drops of shorter duration. Its worst
calendar quarter return in recent years was -22.5% in 1987's
fourth quarter.
Equity investors should have a long-term investment horizon and
be willing to wait out bear markets.
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 read Investment Policies and Practices in Section 3,
which discusses the principal types of portfolio securities that
the fund may purchase as well as the types of management
practices that the fund may use.
New America Growth Portfolio
What is the fund's objective?
The fund's objective is to provide long-term growth of capital
by investing primarily in the common stocks of U.S. growth
companies operating in service industries.
What is the fund's investment program?
The fund will invest most of its assets in service companies,
regardless of size, that are believed by T. Rowe Price to be
above-average performers in their fields. Companies in the
portfolio will range from larger blue chip firms to small,
rapidly growing companies. The fund may also invest up to 25% of
its assets in growth companies outside the service sector. Total
return will consist primarily of capital appreciation or
depreciation.
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 consistent with the fund's investment objectives
and program. The fund may also engage in a variety of investment
management practices, such as buying and selling futures and
options.
What types of service companies will the fund invest in?
The fund will emphasize companies that derive a majority of
their revenues or operating earnings from such activities as
consumer services (retailing, entertainment and leisure, media
and communications, restaurants and food distribution), business
services (health care, computer services), and financial
services (insurance, investment services).
T. Rowe Price analysts will attempt to identify service
companies that are expected to show superior earnings growth. In
addition to their growth prospects, companies will be judged
according to their fundamental strength and the relative
valuations of their stock prices.
The fund also includes companies whose prospects are closely
tied to service industries.
Why does the fund emphasize the service sector?
If service companies, which represent over 50% of the U.S.
economy, outpace overall economic growth, their stocks could
generate above-average returns. Share prices generally rise with
earnings over time, so companies with superior earnings growth
can provide investors with the opportunity for attractive
capital appreciation. In addition, service-oriented companies in
general may have certain advantages over manufacturing companies
because they have lower fixed costs, are less capital intensive,
and maintain smaller physical inventories.
While service-related companies will dominate, the fund will
take advantage of its ability to invest in promising nonservice
growth companies as opportunities occur.
Growth investors look for companies with above-average earnings
gains.
What is meant by a "growth" investment approach?
Sixty years ago, Thomas Rowe Price, Jr. 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.
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 fund may entail above-average risk since rapidly growing
companies paying few dividends are generally more volatile than
companies with slower growth rates and higher dividends. In
addition, the portfolio may contain the stocks of small
companies, that often have limited product lines, markets, or
financial resources. These stocks may have limited marketability
and may be subject to more volatile price movements than
securities of larger companies.
What are some of the fund's potential rewards?
The fund offers the potential for significant, long-term capital
appreciation by participating in the growth of dynamic
service-related companies. In addition, the fund has the
flexibility to seek appreciation opportunities through growth
stock investments outside the service sector.
What are some potential risks and rewards of investing in the
stock market through this fund?
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. Nevertheless,
economic growth has been punctuated by periods of stagnation and
recession. Share prices of all companies, even the best managed
and most profitable, can fall for any number of reasons, ranging
from lower-than-expected earnings to changes in investor
psychology. Significant trading by large institutional investors
also can lead to price declines. In addition, if our assessment
of company prospects proves incorrect, companies that our
managers and analysts expect to do well may perform poorly.
Since 1950, the U.S. stock market has experienced 10 negative
years as well as steep drops of shorter duration. Its worst
calendar quarter return in recent years was -22.5% in 1987's
fourth quarter.
Equity investors should have a long-term investment horizon and
be willing to wait out bear markets.
How can I decide if the fund is appropriate for me?
Consider your investment goals, your time horizon for achieving
them, and your tolerance for risk. If you can accept the risk of
price declines in an effort to achieve superior capital
appreciation, the fund may be an appropriate part of your
overall investment strategy.
Is there other information I need to review before making a
decision?
Be sure to read Investment Policies and Practices in Section 3,
which discusses the principal types of portfolio securities that
the fund may purchase as well as the types of management
practices that the fund may use.
International Stock Portfolio
What is the fund's objective and investment program?
The fund's objective is long-term growth of capital through
investments primarily in common stocks of established, non-U.S.
companies. The fund expects to invest substantially all of its
assets outside the U.S. and to diversify broadly among countries
throughout the world- developed, newly industrialized, and
emerging.
What securities can the fund invest in other than common stocks?
The fund expects to invest substantially all of its assets in
common stocks. However, the fund may also invest in a variety of
other equity-related securities, such as preferred stocks,
warrants and convertible securities, as well as corporate and
governmental debt securities, 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. Under normal market
conditions, the fund's investment in securities other than
common stocks is limited to no more than 35% of total assets.
However, for temporary defensive purposes, the fund may invest
all or a significant portion of its assets in U.S. government
and corporate debt obligations. The fund will not purchase any
debt security which at the time of purchase is rated below
investment grade. This would not prevent the fund from retaining
a security downgraded to below investment grade after purchase.
How does the portfolio manager select stocks?
Price-Fleming blends a bottom-up approach to individual stock
selection based on fundamental research with an awareness of the
economic overview of the countries in our opportunity set.
Country weightings and stock selection are developed through the
interplay of general economic analysis and an examination of the
relative attractiveness of opportunities within each market.
Stock selection is the focal point of decision-making, however.
Fund managers weigh a company's prospects for achieving and
sustaining above-average, long-term earnings growth and also
look at valuation factors such as price/earnings, price/cash
flow, and price/book value ratios.
What are the major risks associated with international investing
and this fund?
Stock prices of foreign and U.S. companies are subject to many
of the same influences, such as general economic conditions,
company and industry earnings prospects, and investor
psychology. However, investing in foreign securities also
involves additional risks which can increase the potential for
losses in the funds. These risks are normally significantly
magnified for investments in emerging markets.
Exchange rate movements can be large and can last for extended
periods.
o Currency fluctuations Transactions in foreign securities
are conducted in local currencies, so dollars must often be
exchanged for another currency when a stock is bought or
sold or a dividend is paid. Likewise, share price
quotations and total return information reflect conversion
into dollars. Fluctuations in foreign exchange rates can
significantly increase or decrease the dollar value of a
foreign investment, boosting or offsetting its local market
return. For example, if a French stock rose 10% in price
during a year, but the U.S. dollar gained 5% against the
French franc during that time, the U.S. investor's return
would be reduced to 5%. This is because the franc would
"buy" fewer dollars at the end of the year than at the
beginning, or, conversely, a dollar would buy more francs.
o Increased costs It is more expensive for U.S. investors to
trade in foreign markets than in the U.S. Mutual funds
offer an efficient way for individuals to invest abroad,
but the overall expense ratios of international funds are
usually higher than those of typical domestic funds.
While certain countries have made progress in economic growth,
liberalization, fiscal discipline, and political and social
stability, there is no assurance these trends will continue.
o Political and economic factors The economies, markets, and
political structures of a number of the countries in which
the fund can invest do not compare favorably with the U.S.
and other mature economies in terms of wealth and
stability. Therefore, investments in these countries will
be riskier and more subject to erratic and abrupt price
movements. This is especially true for emerging markets
such as those found in Latin America, Asia, Eastern Europe,
and Africa. However, even investments in countries with
highly developed economies are subject to risk. For
example, the Japanese stock market historically has
experienced wide swings in value.
Some economies are less well developed (for example,
various countries in Latin America, Eastern Europe, Africa,
and Asia), overly reliant on particular industries, and
more vulnerable to the ebb and flow of international trade,
trade barriers, and other protectionist or retaliatory
measures (for example, Japan, Southeast Asia, Latin
America, Eastern Europe, and Africa). This makes investment
in such markets significantly riskier than in other
countries. Some countries, particularly in Latin America
and other emerging markets, have legacies of hyperinflation
and currency devaluations versus the dollar (which
adversely affects returns to U.S. investors). Investments
in countries that have recently begun moving away from
central planning and state-owned industries toward free
markets, such as Eastern Europe, China, and Africa, should
be regarded as speculative.
Certain countries have histories of instability and upheaval
(for example, various countries in Latin America and Africa)
with respect to their internal politics that could cause their
governments to act in a detrimental or hostile manner toward
private enterprise or foreign investment. Actions such as
nationalizing a company or industry, expropriating assets, or
imposing punitive taxes could have a severe effect on security
prices and impair a fund's ability to repatriate capital or
income. Significant external risks, including war, currently
affect some countries. Governments in many emerging market
countries participate to a significant degree in their economies
and securities markets.
o Legal, regulatory, and operational Certain countries lack
uniform accounting, auditing, and financial reporting
standards, have less governmental supervision of financial
markets than in the U.S., do not honor legal rights enjoyed
in the U.S., and have settlement practices, such as delays,
which could subject a fund to risks not customary in the
U.S. In addition, securities markets in these countries
have substantially lower trading volumes than U.S. markets,
resulting in less liquidity and more volatility than in the
U.S.
o Pricing Portfolio securities may be listed on foreign
exchanges that are open days (such as Saturdays) when the
funds do not compute their prices. As a result, a fund's
net asset value may change significantly on days when
shareholders cannot make transactions.
For more details on potential risks of foreign investments,
please see Investment Policies and Practices.
What can I expect in terms of price volatility?
Like U.S. stock investments, common stocks of foreign companies
offer investors a way to build capital over time. Nevertheless,
the long-term rise of foreign stock prices as a group has been
punctuated by declines. Share prices of all companies, even the
best managed, most profitable, whether U.S. or foreign, are
subject to market risk, which means they can fluctuate widely.
In less well-developed stock markets, such as those found in
Latin America, Eastern Europe, Africa, and Asia, volatility may
be heightened by actions of a few major investors. For example,
substantial increases or decreases in cash flows of mutual funds
investing in these markets could significantly affect local
stock prices and, therefore, fund share prices.
How does the portfolio manager try to reduce risk?
The fund's share price will fluctuate; when you sell your
shares, you may lose money.
The principal tools are intensive research and diversification;
currency hedging techniques are used from time to time.
o In addition to conducting on-site research in portfolio
countries and companies, Price-Fleming has close ties with
investment analysts based throughout the world.
o Diversification significantly reduces but does not
eliminate risk. The impact on a fund's share price from a
drop in the price of a particular stock is reduced
substantially by investing in a portfolio with dozens of
different companies. Likewise, the impact of unfavorable
developments in a particular country is reduced when
investments are spread among many countries.
Portfolio managers keep close watch on individual
investments as well as on political and economic trends in
each country and region. Holdings are adjusted according to
the manager's analysis and outlook.
o Under normal conditions, the funds do not engage in
extensive currency hedging programs. However, when foreign
exchange rates are expected to be unfavorable for U.S.
investors, fund managers can hedge the risk through the use
of currency forwards and options. In a general sense, these
tools allow a manager to exchange currencies in the future
at a rate specified in the present. (For more details,
please see Foreign Currency Transactions under Investment
Policies and Practices.) If the manager's forecast is
wrong, the hedge may cause a loss. Also, it may be
difficult or not practical to hedge currency risk in many
emerging countries.
What are some of the potential advantages and disadvantages of
investing beyond U.S. borders?
Since U.S. stocks represent less than half of the world's stock
market capitalization, investing abroad increases the
opportunities available to you. Foreign investments also provide
effective diversification for an all-U.S. portfolio, since
historically their returns have not moved in sync with U.S.
stocks over longer periods.
Investing in foreign stocks entails many of the same risks as
investing in U.S. stocks and others as well, such as currency
risk; these are discussed later on in this section. Also,
foreign stocks may not always move counter to U.S. stocks,
particularly in the short run.
How can I decide if the fund may be appropriate for me?
First, be sure that your investment objective is the same as the
fund's: capital appreciation over time. If you will need the
money you plan to invest in the near future, the fund is not
suitable.
Second, your decision should take into account whether you have
any other foreign stock investments.
Third, consider your risk tolerance and the risk profile of the
fund.
Is there other information I need to review before making a
decision?
Be sure to read Investment Policies and Practices in Section 3,
which discusses the principal types of portfolio securities that
the fund may purchase as well as the types of management
practices that the fund may use.
Consider your investment goals, your time horizon for achieving
them and your tolerance for risk. Compare these to the
description of the funds. You may find the chart below helpful
in this process.
You can purchase shares in these funds for variable annuity
contracts.
Comparison of Variable Annuity Portfolios
Portfolio Investment Portfolio
Emphasis Risk/Reward Profile
Prime High-quality, Managed to maintain
Reserve U.S. dollar- stable share price of
denominated money $1.00 while
market securities. generating current
income.
Limited-Term Short- and Moderate income level
Bond intermediate-term and share price
investment-grade fluctuations.
bonds.
Personal Strategy Approximately 60% Middle-of-the-road
Balanced stocks,30% bonds, approach. Higher risk
10% money markets. and return potential
than a bond fund, but
lower than a stock
fund.
Equity Income Stocks of Relatively
established conservative
companies with stock fund. Greater
above average risk and return
dividends. potential than a
bond fund, but
lower than a growth stock
fund.
Mid-Cap Growth Stocks of medium- Moderately aggressive
sized growth domestic stock fund.
companies. Relatively high
potential risk and
reward.
New America Growth Stocks of rapidly Aggressive domestic
growing U.S. stock fund. High
companies potential risk
operating in the and reward.
service sector.
International Stocks of estab- Aggressive inter-
Stock lished non-U.S. national stock
companies. fund. High poten-
tial risk and reward;
subject to risks unique to foreign
investing.
Table 3
About Your Account
Pricing Shares and Receiving Sale Proceeds
Here are some procedures you should know when investing in a
fund. For instructions on how to purchase a T. Rowe Price
No-Load Variable Annuity Contract, read the attached separate
account prospectus for the T. Rowe Price No-Load Variable
Annuity.
Shares of each fund will be offered to insurance company
separate accounts (including the T. Rowe Price Variable Annuity
Account, a separate account of Security Benefit Life Insurance
Company ("Security Benefit")) established for the purpose of
funding variable annuity contracts. They may also be offered to
insurance company separate accounts established for the purpose
of funding variable life contracts. Variable annuity and
variable life Contract Holders or Participants (including
individuals purchasing the T. Rowe Price No-Load Variable
Annuity) are not the shareholders of a fund. Rather, the
separate account is the shareholder. The T. Rowe Price No-Load
Variable Annuity and Variable Life Contracts are issued by
Security Benefit and is described in the attached prospectus.
The funds assume no responsibility for any insurance company
prospectuses, or variable annuity or life contracts.
Shares of the funds 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 accompanying prospectus for the T.
Rowe Price No-Load Variable Annuity.
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 a fund.
Dividends and Other Distributions
For a discussion of the tax status of your variable annuity
contract, please refer to the attached separate account
prospectus.
Dividends and other distributions The policy of each 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 for the Prime
Reserve and Limited-Term Bond Portfolios are declared daily and
paid monthly. Dividends for the Personal Strategy Balanced and
Equity Income Portfolios are declared and paid quarterly.
Dividends (if any) for the other funds 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
a 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 funds intend to diversify their 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.
More About the Funds
Organization and Management
How are the funds organized?
T. Rowe Price Fixed Income Series, Inc. ("Income Corporation"),
T. Rowe Price Equity Series, Inc. ("Equity Corporation") and T.
Rowe Price International Series, Inc. ("International
Corporation") are each Maryland corporations organized in 1994
and registered with the Securities and Exchange Commission under
the Investment Company Act of 1940 as a diversified, open-end
investment companies, commonly known as "mutual funds." Mutual
funds pool money received from shareholders and invest it to try
to achieve specific objectives. Each Corporation is a series
fund and has the authority to issue other series in addition to
those currently in existence.
Currently, the Fixed Income Corporation has two series, the
Limited-Term Bond Portfolio (established in 1994) and the Prime
Reserve Portfolio (established in 1996); the Equity Corporation
has four series, the Personal Strategy Balanced, Equity Income
and New America Growth Portfolios (each established in 1994) and
the Mid-Cap Growth Portfolio (established in 1996); and the
International Corporation has one series, the International
Stock Portfolio (established in 1994), and each represents a
separate class of shares having different objectives and
investment policies.
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 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 of
a fund may call a special meeting if they wish for the purpose
of voting on the removal of any fund director.
Who runs the funds?
General Oversight The Corporations are governed by a Board of
Directors that meets regularly to review the Corporations'
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 their
investment manager.
Prime Reserve Portfolio
Limited-Term Bond Portfolio
Equity Income Portfolio
Mid-Cap Growth Portfolio
New America Growth Portfolio
Personal Strategy Balanced Portfolio
Investment Manager T. Rowe Price is responsible for selection
and management of the funds' portfolio investments. T. Rowe
Price serves as investment manager to a variety of individual
and institutional investors, including limited and real estate
partnerships and other mutual funds.
T. Rowe Price was incorporated in Maryland in 1947 as successor
to the investment counseling business founded by the late Thomas
Rowe Price, Jr. in 1937. As of December 31 1996, T. Rowe Price
and its affiliates managed over $99 billion of assets for over
five million individual and institutional investor accounts.
International Stock Portfolio
Flemings is a diversified investment organization which
participates in a global network of regional investment offices
in New York, London, Zurich, Geneva, Tokyo, Hong Kong, Manila,
Kuala Lumpur, Seoul, Taipei, Bombay, Jakarta, Singapore,
Bangkok, and Johannesburg.
Investment Manager Price-Fleming is responsible for selection
and management of the fund's portfolio investments.
Price-Fleming's U.S. office is located at 100 East Pratt Street,
Baltimore, Maryland 21202. Price-Fleming also has offices in
London, Tokyo, Singapore, and Hong Kong.
Price-Fleming was incorporated in Maryland in 1979 as a joint
venture between T. Rowe Price and Robert Fleming Holdings
Limited (Flemings).
T. Rowe Price, Flemings, and Jardine Fleming are owners of
Price-Fleming. The common stock of Price-Fleming is 50% owned by
a wholly owned subsidiary of T. Rowe Price, 25% by a subsidiary
of Flemings, and 25% by a subsidiary of Jardine Fleming Group
Limited (Jardine Fleming). (Half of Jardine Fleming is owned by
Flemings and half by Jardine Matheson Holdings Limited.) T. Rowe
Price has the right to elect a majority of the Board of
Directors of Price-Fleming, and Flemings has the right to elect
the remaining directors, one of whom will be nominated by
Jardine Fleming.
Research and Administration Certain administrative support is
provided by T. Rowe Price, which receives from Price-Fleming a
fee of .15% of the market value of all assets in equity
accounts, .15% of the market value of all assets in active fixed
income accounts, and .035% of the market value of all assets in
passive fixed income accounts under Price-Fleming's management.
Additional investment research and administrative support for
equity investments is provided to Price-Fleming by Fleming
Investment Management Limited (FIM) and Jardine Fleming
International Holdings Limited (JFIH), for which each receives
from Price-Fleming a fee of .075% of the market value of all
assets in equity accounts under Price-Fleming's management.
Fleming International Asset Management Limited (FIAM) and JFIH
provide research and administration support for fixed income
accounts for which each receive a fee of .075% of the market
value of all assets in active fixed income accounts and .0175%
of such market value in passive fixed income accounts under
Price-Fleming's management. FIM and JFIH are wholly owned
subsidiaries of Flemings and Jardine Fleming, respectively, and
FIAM is an indirect subsidiary of Flemings.
Portfolio Management
The Prime Reserve Portfolio has an Investment Advisory Committee
composed of the following members: Edward A. Wiese, Chairman,
Patrice L. Berchtenbreiter, Paul W. Boltz, Brian E. Burns,
Robert P. Campbell, Donna M. Davis-Ennis, James M. McDonald,
Joan R. Potee, Robert M. Rubino, and Gwendolyn G. Wagner. The
committee chairman has day-to-day responsibility for managing
the fund and works with the committee in developing and
executing the fund's investment program. Mr. Wiese has been
chairman of the fund's committee since its inception in 1996. He
joined T. Rowe Price in 1984 and has been managing investments
since 1985.
The Limited-Term Bond Portfolio has an Investment Advisory
Committee composed of the following members: Edward A. Wiese,
Chairman, Paul W. Boltz, Robert P. Campbell, Christy M.
DiPietro, Charles B. Hill, Cheryl A. Redwood, Robert M. Rubino,
Thomas E. Tewksbury, Mark J. Vaselkiv, and Gwendolyn G. Wagner.
The committee chairman has day-to-day responsibility for
managing the fund and works with the committee in developing and
executing the fund's investment program. Mr. Wiese has been
chairman of the fund's committee since 1995. Mr. Wiese joined T.
Rowe Price in 1984 and has been managing investments since 1985.
The Equity Income Portfolio has an Investment Advisory Committee
composed of the following members: Brian C. Rogers, Chairman,
Thomas H. Broadus, Jr., Richard P. Howard, William J. Stromberg,
and Daniel M. Theriault. The committee chairman has day-to-day
responsibility for managing the fund and works with the
committee in developing and executing the fund's investment
program. Mr. Rogers has been chairman of the committee since its
inception in 1994. He joined T. Rowe Price in 1982 and has been
managing investments since 1983.
The Mid-Cap Growth Portfolio has an Investment Advisory
Committee composed of the following members: Brian W. H.
Berghuis, Chairman, Marc L. Baylin, James A. C. Kennedy III, 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 1992. Mr. Berghuis has been managing investments since
joining T. Rowe Price in 1985.
The New America Growth Portfolio has an Investment Advisory
Committee composed of the following members: John H. Laporte,
Chairman, Marc L. Baylin, Brian W. H. Berghuis, 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.
Laporte has been chairman of the fund's committee since its
inception in 1994. Mr. Laporte joined T. Rowe Price in 1976 and
has been managing investments since 1984.
The Personal Strategy Balanced Portfolio's investments are
guided by two Committees. An Asset Allocation Committee meets
regularly to determine the asset allocation of the fund among
stocks, bonds, and money market securities. Committee members
include Peter Van Dyke, Chairman, Stephen W. Boesel, Edmund M.
Notzon, William T. Reynolds, James S. Riepe, Charles P. Smith,
and M. David Testa.
Day-to-day responsibility for managing the fund's investments
lies with an Investment Advisory Committee which includes
Messrs. Boesel, Notzon, Peters, Puglia, Reynolds, Testa, Van
Dyke, Ward, and Whitney.
The Asset Allocation Committee has been acting in this role for
T. Rowe Price since 1990, and its members bring a wide range of
investment experience to this task. Members of the Investment
Advisory Committee responsible for making day-to-day portfolio
decisions for the fund are each experienced investment managers.
Mr. Van Dyke has been managing investments since joining T. Rowe
Price in 1985. Mr. Boesel has been managing investments since
joining T. Rowe Price in 1973. Mr. Testa has been managing
investments since joining T. Rowe Price in 1972. Mr. Notzon
joined T. Rowe Price in 1989 and has been managing investments
since 1991. Mr. Puglia joined T. Rowe Price in 1990 and has been
managing investments since 1993. Mr. Whitney joined T. Rowe
Price in 1985 and has been managing investments since 1986. Mr.
Reynolds joined T. Rowe Price in 1981 and has been managing
investments since 1978. Ms. Ward joined T. Rowe Price in 1983
and has been managing investments since 1992. Mr. Peters joined
T. Rowe Price in 1993 and has been managing investments since
1987.
The International Stock Portfolio has an investment advisory
group composed of the following members: Martin G. Wade,
Christopher D. Alderson, Peter B. Askew, Mark J. T. Edwards,
John R. Ford, James B. M. Seddon, Benedict R. F. Thomas, and
David J. L. Warren. This group has day-to-day responsibility for
managing the portfolio and developing and executing the fund's
investment program.
Martin Wade joined Price-Fleming in 1979 and has 27 years of
experience with the Fleming Group in research, client service,
and investment management. (Fleming Group includes Robert
Fleming and/or Jardine Fleming.) Christopher Alderson joined
Price-Fleming in 1988, and has 10 years of experience with the
Fleming Group in research and portfolio management. Peter Askew
joined Price-Fleming in 1988 and has 21 years of experience
managing multi-currency fixed income portfolios. Mark Edwards
joined Price-Fleming in 1986 and has 15 years of experience in
financial analysis. John Ford joined Price-Fleming in 1982 and
has 16 years of experience with the Fleming Group in research
and portfolio management. James Seddon joined Price-Fleming in
1987 and has 11 years of portfolio management experience.
Benedict Thomas joined Price-Fleming in 1988 and has seven years
of portfolio management experience. David Warren joined
Price-Fleming in 1984 and has 16 years of experience in equity
research, fixed income research, and portfolio management.
Portfolio Transactions Decisions with respect to the purchase
and sale of a fund's portfolio securities on behalf of the fund
are made by T. Rowe Price or Price-Fleming, as the case may be.
Each fund's Board of Directors has authorized T. Rowe Price or
Price-Fleming to utilize affiliates of Flemings and Jardine
Fleming in the capacity of broker in connection with the
execution of the fund's portfolio transactions. Price-Fleming
would utilize these affiliates only if it believes that doing so
would result in an economic advantage (in the form of lower
execution costs or otherwise) being obtained by the
International Stock Portfolio.
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 each fund will
be paid by T. Rowe Price (or in the case of International Stock
Portfolio, Price-Fleming), except interest, taxes, brokerage
commissions, directors' fees and expenses (including counsel
fees and expenses) and extraordinary expenses. The Board of
Directors of each Corporation reserves the right to impose
additional fees against shareholder accounts to defray expenses
which would otherwise be paid by T. Rowe Price or Price-Fleming,
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 or Price-Fleming, as the case
may be.
The Management Fee Each fund pays T. Rowe Price, or for the
International Stock Portfolio, Price-Fleming, a single,
all-inclusive fee based on the fund's average daily net assets
to cover investment management and operating expenses. The
all-inclusive management fee for each fund is noted below.
Prime Reserve Portfolio 0.55%
Limited-Term Bond Portfolio 0.70%
Personal Strategy Balanced Portfolio 0.90%
Equity Income Portfolio 0.85%
Mid-Cap Growth Portfolio 0.85%
New America Growth Portfolio 0.85%
International Stock Portfolio 1.05%
From time to time, T. Rowe Price or, for the International Stock
Portfolio, Price-Fleming, may pay participating insurance
companies for services provided by such insurance companies for
the fund or on behalf of contract holders.
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 funds may serve as an investment medium for both variable
annuity contracts and variable life insurance policies. Shares
of the funds may be offered to separate accounts established by
any number of insurance companies. The funds currently do not
foresee any disadvantages to variable annuity contract owners
due to the fact that the funds 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 funds serve as investment medium might at some time be in
conflict. However, each fund's Board of Directors is required to
monitor events to identify any material conflicts between
variable annuity contract owners and variable life policy
owners, and will determine what action, if any, should be taken
in the event of such a conflict. If such a conflict were to
occur, an insurance company participating in a 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 each fund's performance. You will come across them in
shareholder reports you receive from us.
Total return is the most widely used performance measure.
Detailed performance information is included in fund annual and
semiannual shareholder reports, and in the quarterly Performance
Update which are all 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.
Yield
The Prime Reserve Portfolio may advertise "current" yield,
reflecting the latest seven-day income annualized, or an
"effective" yield, which assumes the income has been reinvested
in the fund.
The Limited-Term Bond Portfolio may advertise a yield figure
derived by dividing the fund's net investment income per share
(as defined by applicable SEC regulations) during a 30-day base
period by the per share price on the last day of the base
period.
Total returns and yields quoted for the funds include the effect
of deducting each fund's expenses, but may not include charges
and expenses attributable to any particular insurance product.
Since you can only purchase shares of the funds 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 each fund may hold in its portfolio and the various
kinds of investment practices that may be used in day-to-day
portfolio management. Each 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 a
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. Each 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.
A fund's holdings of certain kinds of investments cannot exceed
maximum percentages of total assets, which are set forth herein.
For instance, these funds are not permitted to invest more than
10% of total assets in hybrid instruments. While these
restrictions provide a useful level of detail about a fund's
investment program, investors should not view them as an
accurate gauge of the potential risk of such investments. For
example, in a given period, a 5% investment in hybrid
instruments could have significantly more than a 5% impact on a
fund's share price. The net effect of a particular investment
depends on its volatility and the size of its overall return in
relation to the performance of all each fund's other
investments.
Changes in each fund's holdings, each fund's performance, and
the contribution of various investments are discussed in the
shareholder reports sent to you.
Prime Reserve Portfolio
Types of Portfolio Securities
In seeking to meet its investment objective, the fund may invest
in any type of short-term security or instrument 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.
Money Market Securities
Money market securities are IOUs issued by companies or
governmental units. Money market securities may be
interest-bearing or discounted to reflect the rate of interest
paid. In the case of interest-bearing securities, the issuer has
a contractual obligation to pay coupon interest at a stated rate
on specific dates and to repay the face value on a specified
date. In the case of a discount security, no coupon interest is
paid, but the security's price is discounted so that the
interest is realized when the security matures at face value. In
either case, an issuer may have the right to redeem or "call"
the security before maturity, and the investor may have to
reinvest the proceeds at lower market rates.
Except for adjustable rate instruments, a money market
security's interest rate, as reflected in the coupon rate or
discount, is usually fixed for the life of the security. Its
current yield (coupon or discount as a percent of current price)
will fluctuate to reflect changes in interest rate levels. A
money market security's price usually rises when interest rates
fall, and vice versa.
Money market securities may be unsecured (backed by the issuer's
general creditworthiness only) or secured (also backed by
specified collateral).
Certain money market securities have interest rates that are
adjusted periodically which tend to minimize fluctuations in
their principal value. When calculating its weighted average
maturity, the fund may shorten the maturity of these securities
in accordance with Rule 2a-7.
Operating policy: Except as may be permitted by Rule 2a-7, the
fund will not purchase any security (other than a U.S.
government security) if it would cause the fund to have more
than: (1) 5% of its total assets in securities of that issuer,
where the securities are prime securities (other than for
certain temporary, limited purposes); or (2) where the
securities are not prime securities, 5% of its total assets in
such securities and 1% of its total assets in the securities of
that issuer.
Asset-Backed Securities An underlying pool of assets, such as
credit card or automobile trade receivables or corporate loans
or bonds, backs these bonds and provides the interest and
principal payments to investors. Credit quality depends
primarily on the quality of the underlying assets and the level
of credit support, if any, provided by the issuer. The
underlying assets (i.e., loans) are subject to prepayments which
can shorten the securities' weighted average life and may lower
their return. The value of these securities also may change
because of actual or perceived changes in the creditworthiness
of the originator, servicing agent, or of the financial
institution providing the credit support. There is no limit on
the fund's investment in these securities.
Foreign securities increase the fund's diversification and may
enhance return, but involve special risks, especially for
developing countries.
Foreign Securities The fund may invest in certain foreign
securities-dollar-denominated money market securities of foreign
issuers, foreign branches of U.S. banks, and U.S. branches of
foreign banks. 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; and possible problems arising from accounting,
disclosure, settlement, and regulatory practices that differ
from U.S. standards.
Operating policy: The fund may invest without limit in U.S.
dollar-denominated foreign securities.
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 10% of its
net assets in illiquid securities.
Types of Management Practices
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 331_3% of total
fund assets.
Operating policy: 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 331_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.
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.
Limited-Term Bond Portfolio
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 described in this section)
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.
Bonds A bond is an interest-bearing security- an IOU-issued by
companies or governmental units. The issuer has a contractual
obligation to pay interest at a stated rate on specific dates
and to repay principal (the bond's face value) on a specified
date. An issuer may have the right to redeem or "call" a bond
before maturity, and the investor may have to reinvest the
proceeds at lower market rates.
A bond's annual interest income, set by its coupon rate, is
usually fixed for the life of the bond. Its yield (income as a
percent of current price) will fluctuate to reflect changes in
interest rate levels. A bond's price usually rises when interest
rates fall, and vice versa, so its yield stays current.
Bonds may be unsecured (backed by the issuer's general
creditworthiness only) or secured (also backed by specified
collateral).
Certain bonds have interest rates that are adjusted
periodically, which tend to minimize fluctuations in their
principal value. The maturity of those securities may be
shortened under certain specified conditions.
Bonds may be designated as senior or subordinated obligations.
Senior obligations generally have the first claim on a
corporation's earnings and assets and, in the event of
liquidation, are paid before subordinated debt.
Asset-Backed Securities An underlying pool of assets, such as
credit card or automobile trade receivables or corporate loans
or bonds, backs these bonds and provides the interest and
principal payments to investors. On occasion, the pool of assets
may also include a swap obligation, which is used to change the
cash flows on the underlying assets. As an example, a swap may
be used to allow floating rate assets to back a fixed rate
obligation. Credit quality depends primarily on the quality of
the underlying assets, the level of credit support, if any,
provided by the issuer, and the credit quality of the swap
counterparty, if any. The underlying assets (i.e., loans) are
subject to prepayments which can shorten the securities'
weighted average life and may lower their return. The value of
these securities also may change because of actual or perceived
changes in the creditworthiness of the originator, the servicing
agent, the financial institution providing the credit support,
or of the swap counterparty. There is no limit on the fund's
investment in these securities.
Mortgage-Backed Securities The fund may invest in a variety of
mortgage-backed securities. Mortgage lenders pool individual
home mortgages with similar characteristics to back a
certificate or bond, which is sold to investors such as the
fund. Interest and principal payments generated by the
underlying mortgages are passed through to the investors. The
"big three" issuers are the Government National Mortgage
Association (GNMA), the Federal National Mortgage Association
(Fannie Mae), and the Federal Home Loan Mortgage Corporation
(Freddie Mac). GNMA certificates are backed by the full faith
and credit of the U.S. government, while others, such as Fannie
Mae and Freddie Mac certificates, are only supported by the
ability to borrow from the U.S. Treasury or supported only by
the credit of the agency. Private mortgage bankers and other
institutions also issue mortgage-backed securities.
Mortgage-backed securities are subject to scheduled and
unscheduled principal payments as homeowners pay down or prepay
their mortgages. As these payments are received, they must be
reinvested when interest rates may be higher or lower than on
the original mortgage security. Therefore, these securities are
not an effective means of locking in long-term interest rates.
In addition, when interest rates fall, the pace of mortgage
prepayments picks up. These refinanced mortgages are paid off at
face value (par), causing a loss for any investor who may have
purchased the security at a price above par. In such an
environment, this risk limits the potential price appreciation
of these securities and can negatively affect the fund's net
asset value. When rates rise, the prices of mortgage-backed
securities can be expected to decline, although historically
these securities have experienced smaller price declines than
comparable quality bonds. In addition, when rates rise, and
prepayments slow, the effective duration of mortgage-backed
securities extends resulting in increased volatility.
o Collateralized Mortgage Obligations (CMOs) CMOs are debt
securities that are fully collateralized by a portfolio of
mortgages or mortgage-backed securities. All interest and
principal payments from the underlying mortgages are passed
through to the CMOs in such a way as to create, in most
cases, more definite maturities than is the case with the
underlying mortgages. CMOs may pay fixed or variable rates
of interest, and certain CMOs have priority over others
with respect to the receipt of prepayments.
o Stripped Mortgage Securities Stripped mortgage securities
(a type of potentially high-risk derivative) are created by
separating the interest and principal payments generated by
a pool of mortgage-backed securities or a CMO to create
additional classes of securities. Generally, one class
receives only interest payments (IOs) and one principal
payments (POs). Unlike other mortgage-backed securities and
POs, the value of IOs tends to move in the same direction
as interest rates. The fund could use IOs as a hedge
against falling prepayment rates (interest rates are
rising) and/or a bear market environment. POs can be used
as a hedge against rising prepayment rates (interest rates
are falling) and/or a bull market environment. IOs and POs
are acutely sensitive to interest rate changes and to the
rate of principal prepayments.
A rapid or unexpected increase in prepayments can severely
depress the price of IOs, while a rapid or unexpected decrease
in prepayments could have the same effect on POs. These
securities are very volatile in price and may have lower
liquidity than most other mortgage-backed securities. Certain
non-stripped CMOs may also exhibit these qualities, especially
those that pay variable rates of interest that adjust inversely
with and more rapidly than short-term interest rates. In
addition, if interest rates rise rapidly and prepayment rates
slow more than expected, certain CMOs, in addition to losing
value, can exhibit characteristics of longer securities and
become more volatile. There is no guarantee the fund's
investment in CMOs, IOs, or POs will be successful, and the
fund's total return could be adversely affected as a result.
Operating policy: The fund may invest up to 10% of its total
assets in stripped mortgage securities.
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 or interest rate of a hybrid could be tied (positively or
negatively) to the price of some commodity, currency, or
securities index or another interest rate (each a "benchmark").
Hybrids can be used as an efficient means of pursuing a variety
of investment goals, including currency hedging, duration
management, and increased total return. Hybrids may not bear
interest or pay dividends. The value of a hybrid or its interest
rate may be a multiple of a benchmark and, as a result, may be
leveraged and move (up or down) more steeply and rapidly than
the benchmark. These benchmarks may be sensitive to economic and
political events, such as commodity shortages and currency
devaluations, which cannot be readily foreseen by the purchaser
of a hybrid. Under certain conditions, the redemption value of
a hybrid could be zero. Thus, an investment in a hybrid may
entail significant market risks that are not associated with a
similar investment in a traditional, U.S. dollar-denominated
bond that has a fixed principal amount and pays a fixed rate or
floating rate of interest. The purchase of hybrids also exposes
the fund to the credit risk of the issuer of the hybrid. These
risks may cause significant fluctuations in the net asset value
of the fund.
Operating policy: The fund may invest up to 10% of its total
assets in hybrid instruments.
High-Yield/High-Risk Investing The total return and yield of
lower-quality (high-yield/high-risk) bonds, commonly referred to
as "junk" bonds, can be expected to fluctuate more than the
total return and yield of higher-quality bonds. Junk bonds
(those rated below BBB or in default) are regarded as
predominantly speculative with respect to the issuer's ability
to meet principal and interest payments. Successful investment
in lower-medium- and low-quality bonds involves greater
investment risk and is highly dependent on T. Rowe Price's
credit analysis. A real or perceived economic downturn or rising
interest rates could cause a decline in high-yield bond prices,
by lessening the ability of issuers to make principal and
interest payments. These bonds are often thinly traded and can
be more difficult to sell and value accurately than high-quality
bonds. Because objective pricing data may be less available,
judgment may play a greater role in the valuation process.
Operating policy: The fund will not purchase a
noninvestment-grade debt security (or junk bond) if immediately
after such purchase the fund would have more than 10% of its
total assets invested in such securities.
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.
Foreign Securities The fund may invest in foreign securities,
including nondollar-denominated securities traded outside of the
U.S. and dollar-denominated securities of foreign issuers. 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).
To the extent the fund invests in developing countries, these
risks are increased.
Operating policy: The fund may invest without limitation, in
U.S. dollar-denominated debt securities issued by foreign
issuers, foreign branches of U.S. banks, and U.S. branches of
foreign banks. The fund may also invest up to 20% of its total
assets (excluding reserves) in non-U.S. dollar-denominated fixed
income securities principally traded in financial markets
outside the United States.
Types of Management Practices
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 331_3% of total
fund assets.
Operating policy: 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 331_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.
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 interest rates, bond prices, and foreign
currencies; as an efficient means of adjusting its overall
exposure to certain markets; in an effort to enhance income; to
protect the value of portfolio securities; and to adjust the
portfolio's duration. The fund may purchase, sell, or write call
and put options on securities, financial indices, and foreign
currencies.
Futures contracts and options may not always be successful
hedges; their prices can be highly volatile. Using them could
lower the fund's total return, and the potential loss from the
use of futures can exceed the fund's initial investment in such
contracts.
Operating policies: Futures: Initial margin deposits and
premiums on options used for non-hedging purposes will not equal
more than 5% of the fund's net asset value. Options on
securities: The total market value of securities against which
the fund has written call or put options may not exceed 25% of
its total assets. The fund will not commit more than 5% of its
total assets to premiums when purchasing call or put options.
Interest Rate Swaps The fund may enter into various interest
rate transactions (a type of potentially high-risk derivative
investment) such as interest rate swaps and the purchase or sale
of interest rate caps, collars, and floors, to preserve a return
or spread on a particular investment or portion of its
portfolio, to create synthetic securities, or to structure
transactions designed for other purposes.
Operating policy: The fund will not invest more than 10% of its
total assets in interest rate swaps.
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." The fund may also use these contracts
to create a synthetic bond-issued by a U.S. company, for
example, but with the dollar component transformed into a
foreign currency. Although foreign currency transactions will be
used primarily to protect the fund's foreign securities from
adverse currency movements relative to the dollar, they involve
the risk that anticipated currency movements will not occur and
the fund's total return could be reduced.
Operating policy: The fund will not commit more than 10% of its
total assets to forward currency contracts.
Lending of Portfolio Securities Like other mutual funds, the
funds 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, a 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.
When-Issued Securities and Forward Commitment Contracts The fund
may purchase securities on a when-issued or delayed delivery
basis or may purchase or sell securities on a forward commitment
basis. There is no limit on the fund's investment in these
securities. The price of these securities is fixed at the time
of the commitment to buy, but delivery and payment can take
place a month or more later. During the interim period, the
market value of the securities can fluctuate, and no interest
accrues to the purchaser. At the time of delivery, the value of
the securities may be more or less than the purchase or sale
price. To the extent the fund remains fully or almost fully
invested (in securities with a remaining maturity of more than
one year) at the same time it purchases these securities, there
will be greater fluctuations in the fund's net asset value than
if the fund did not purchase them.
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. The fund's portfolio turnover rate for
the fiscal years ended December 31, 1996 and 1995 were 97.7% and
73.7%, respectively. For the fiscal period ended December 31,
1994, the fund's annualized portfolio turnover rate was 146.0%.
Bond Ratings and High-Yield Bonds Larger bond issues are
evaluated by rating agencies such as Moody's and Standard &
Poor's on the basis of the issuer's ability to meet all required
interest and principal payments. The highest ratings are
assigned to issuers perceived to be the best credit risks. T.
Rowe Price research analysts also evaluate all portfolio
holdings of each fund, including those rated by an outside
agency. Other things being equal, lower-rated bonds have higher
yields due to greater risk. High-yield bonds, also called "junk"
bonds, are those rated below BBB.
Table 4 shows the rating scale used by the major rating
agencies. T. Rowe Price considers publicly available ratings but
emphasizes its own credit analysis when selecting investments.
Ratings of Corporate Debt Securities
Moody's Standard Fitch
Investor & Poor's Investors
Services Services, Inc. Services, Inc. Definition
Long-Term
Aaa AAA AAA Highest
quality
Aa AA AA High
quality
A A A Upper
medium
grade
Baa BBB BBB Medium
grade
Ba BB BB Specu-
lative
B B B Highly
specu-
lative
C Caa CCC, CC Vulner-
able
to default
Ca C C Default is
imminent
C D DDD, DD, D Probably in
default
Moody's S&P Fitch
Commercial Paper
P-1 Superior A-1+ F-1+ Exceptionally
quality Extremely strong quality
strong
quality
A-1 Strong F-1 Very strong
quality quality
P-2 Strong A-2 Satis- F-2 Good
quality factory credit quality
quality
P-3 Accept- A-3 Ade- F-3 Fair
able quate credit quality
quality quality
B Specu- F-S Weak
lative credit quality
quality
C Doubtful
quality
Table 4
Personal Strategy Balanced Portfolio
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 described in this section)
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.
Bonds A bond is an interest-bearing security-an IOU-issued by
companies or governmental units. The issuer has a contractual
obligation to pay interest at a stated rate on specific dates
and to repay principal (the bond's face value) on a specified
date. An issuer may have the right to redeem or "call" a bond
before maturity, and the investor may have to reinvest the
proceeds at lower market rates.
A bond's annual interest income, set by its coupon rate, is
usually fixed for the life of the bond. Its yield (income as a
percent of current price) will fluctuate to reflect changes in
interest rate levels. A bond's price usually rises when interest
rates fall, and vice versa, so its yield stays current.
Bonds may be unsecured (backed by the issuer's general
creditworthiness only) or secured (also backed by specified
collateral).
Certain bonds have interest rates that are adjusted
periodically, which tend to minimize fluctuations in their
principal value. The maturity of those securities may be
shortened under certain specified conditions.
Bonds may be designated as senior or subordinated obligations.
Senior obligations generally have the first claim on a
corporation's earnings and assets and, in the event of
liquidation, are paid before subordinated debt.
Operating policy: At least 25% of the fund's total assets must
be senior fixed income securities.
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 that may be made in such countries.
Operating policy: The fund may invest up to 35% of its total
assets (excluding reserves) in foreign securities.
Asset-Backed Securities An underlying pool of assets, such as
credit card or automobile trade receivables or corporate loans
or bonds, backs these bonds and provides the interest and
principal payments to investors. On occasion, the pool of assets
may also include a swap obligation, which is used to change the
cash flows on the underlying assets. As an example, a swap may
be used to allow floating rate assets to back a fixed rate
obligation. Credit quality depends primarily on the quality of
the underlying assets, the level of credit support, if any,
provided by the issuer, and the credit quality of the swap
counterparty, if any. The underlying assets (i.e., loans) are
subject to prepayments which can shorten the securities'
weighted average life and may lower their return. The value of
these securities also may change because of actual or perceived
changes in the creditworthiness of the originator, the servicing
agent, the financial institution providing the credit support,
or of the swap counterparty. There is no limit on the fund's
investment in these securities.
Mortgage-Backed Securities The fund may invest in a variety of
mortgage-backed securities. Mortgage lenders pool individual
home mortgages with similar characteristics to back a
certificate or bond, which is sold to investors such as the
fund. Interest and principal payments generated by the
underlying mortgages are passed through to the investors. The
"big three" issuers are the Government National Mortgage
Association (GNMA), the Federal National Mortgage Association
(Fannie Mae), and the Federal Home Loan Mortgage Corporation
(Freddie Mac). GNMA certificates are backed by the full faith
and credit of the U.S. government, while others, such as Fannie
Mae and Freddie Mac certificates, are only supported by the
ability to borrow from the U.S. Treasury or supported only by
the credit of the agency. Private mortgage bankers and other
institutions also issue mortgage-backed securities.
Mortgage-backed securities are subject to scheduled and
unscheduled principal payments as homeowners pay down or prepay
their mortgages. As these payments are received, they must be
reinvested when interest rates may be higher or lower than on
the original mortgage security. Therefore, these securities are
not an effective means of locking in long-term interest rates.
In addition, when interest rates fall, the pace of mortgage
prepayments picks up. These refinanced mortgages are paid off at
face value (par), causing a loss for any investor who may have
purchased the security at a price above par. In such an
environment, this risk limits the potential price appreciation
of these securities and can negatively affect the fund's net
asset value. When rates rise, the prices of mortgage-backed
securities can be expected to decline, although historically
these securities have experienced smaller price declines than
comparable quality bonds. In addition, when rates rise, and
prepayments slow, the effective duration of mortgage-backed
securities extends resulting in increased volatility.
o Collateralized Mortgage Obligations (CMOs) CMOs are
debt securities that are fully collateralized by a
portfolio of mortgages or mortgage-backed securities.
All interest and principal payments from the underlying
mortgages are passed through to the CMOs in such a way
as to create, in most cases, more definite maturities
than is the case with the underlying mortgages. CMOs
may pay fixed or variable rates of interest, and
certain CMOs have priority over others with respect to
the receipt of prepayments.
o Stripped Mortgage Securities Stripped mortgage
securities (a type of potentially high-risk derivative)
are created by separating the interest and principal
payments generated by a pool of mortgage-backed
securities or a CMO to create additional classes of
securities. Generally, one class receives only interest
payments (IOs) and one principal payments (POs). Unlike
other mortgage-backed securities and POs, the value of
IOs tends to move in the same direction as interest
rates. The fund could use IOs as a hedge against
falling prepayment rates (interest rates are rising)
and/or a bear market environment. POs can be used as a
hedge against rising prepayment rates (interest rates
are falling) and/or a bull market environment. IOs and
POs are acutely sensitive to interest rate changes and
to the rate of principal prepayments.
A rapid or unexpected increase in prepayments can severely
depress the price of IOs, while a rapid or unexpected decrease
in prepayments could have the same effect on POs. These
securities are very volatile in price and may have lower
liquidity than most other mortgage-backed securities. Certain
non-stripped CMOs may also exhibit these qualities, especially
those that pay variable rates of interest that adjust inversely
with and more rapidly than short-term interest rates. In
addition, if interest rates rise rapidly and prepayment rates
slow more than expected, certain CMOs, in addition to losing
value, can exhibit characteristics of longer securities and
become more volatile. There is no guarantee the fund's
investment in CMOs, IOs, or POs will be successful, and the
fund's total return could be adversely affected as a result.
Operating policy: The fund may invest up to 10% of its total
assets in stripped mortgage securities.
High-Yield/High-Risk Investing The total return and yield of
lower-quality (high-yield/high-risk) bonds, commonly referred to
as "junk" bonds, can be expected to fluctuate more than the
total return and yield of higher-quality bonds. Junk bonds are
regarded as predominantly speculative with respect to the
issuer's continuing ability to meet principal and interest
payments. Successful investment in lower-medium- and low-quality
bonds involves greater investment risk and is highly dependent
on T. Rowe Price's credit analysis. A real or perceived economic
downturn or higher interest rates could cause a decline in
high-yield bond prices by lessening the ability of issuers to
make principal and interest payments. These bonds are often
thinly traded and can be more difficult to sell and value
accurately than high-quality bonds. Because objective pricing
data may be less available, judgment may play a greater role in
the valuation process. In addition, the entire junk bond market
can experience sudden and sharp price swings due to a variety of
factors, including changes in economic forecasts, stock market
activity, large or sustained sales by major investors, a
high-profile default, or just a change in the market's
psychology. This type of volatility is usually associated more
with stocks than bonds, but junk bond investors should be
prepared for it.
Operating policy: The fund may invest up to 20% of its total
assets in below investment-grade or junk bonds.
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 or interest rate of a hybrid could be tied (positively or
negatively) to the price of some commodity, currency, or
securities index or another interest rate (each a "benchmark").
Hybrids can be used as an efficient means of pursuing a variety
of investment goals, including currency hedging, duration
management, and increased total return. Hybrids may not bear
interest or pay dividends. The value of a hybrid or its interest
rate may be a multiple of a benchmark and, as a result, may be
leveraged and move (up or down) more steeply and rapidly than
the benchmark. These benchmarks may be sensitive to economic and
political events, such as commodity shortages and currency
devaluations, which cannot be readily foreseen by the purchaser
of a hybrid. Under certain conditions, the redemption value of
a hybrid could be zero. Thus, an investment in a hybrid may
entail significant market risks that are not associated with a
similar investment in a traditional, U.S. dollar-denominated
bond that has a fixed principal amount and pays a fixed rate or
floating rate of interest. The purchase of hybrids also exposes
the fund to the credit risk of the issuer of the hybrid. These
risks may cause significant fluctuations in the net asset value
of the fund.
Operating policy: The fund may invest up to 10% of its total
assets in hybrid instruments.
Zero Coupon Bonds and Pay-in-Kind Bonds A zero coupon bond does
not make cash interest payments during the life of the bond.
Instead, it is sold at a deep discount to face value, and the
interest consists of the gradual appreciation in price as the
bond approaches maturity. "Zeros" can be an attractive financing
method for issuers with near-term cash-flow problems.
Pay-in-kind (PIK) bonds pay interest in cash or additional
securities, at the issuer's option, for a specified period. Like
zeros, they may help a corporation economize on cash. PIK prices
reflect the market value of the underlying debt plus any accrued
interest. Zeros and PIKS can be higher- or lower-quality debt,
and both are more volatile than coupon bonds.
The fund is required to distribute to shareholders income
imputed to any zero or PIK investments. Such distributions could
reduce the fund's reserve position.
Operating policy: The fund may invest up to 10% of its total
assets in zero coupon and pay-in-kind bonds.
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.
Types of Management Practices
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 331_3% of total
fund assets.
Operating policy: 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.
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 interest rates, bond prices, and foreign
currencies; as an efficient means of adjusting its overall
exposure to certain markets; in an effort to enhance income; to
protect the value of portfolio securities; and to adjust the
portfolio's duration. The fund may purchase, sell, or write call
and put options on securities, financial indices, and foreign
currencies.
Futures contracts and options may not always be successful
hedges; their prices can be highly volatile. Using them could
lower the fund's total return, and the potential loss from the
use of futures can exceed the fund's initial investment in such
contracts.
Operating policies: Futures: Initial margin deposits and
premiums on options used for non-hedging purposes will not equal
more than 5% of the fund's net asset value. Options on
securities: The total market value of securities against which
the fund has written call or put options may not exceed 25% of
its total assets. The fund will not commit more than 5% of its
total assets to premiums when purchasing call or put options.
Interest Rate Transactions The fund may enter into various
interest rate transactions (a type of potentially high-risk
derivative investment) such as interest rate swaps and the
purchase or sale of interest rate caps, collars, and floors, to
preserve a return or spread on a particular investment or
portion of its portfolio, to create synthetic securities, or to
structure transactions designed for other purposes.
Operating policies: The fund will not invest more than 10% of
its total assets in interest rate transactions.
Managing Foreign Currency Risk Investors in foreign securities
may "hedge" their exposure to potentially unfavorable currency
changes by purchasing a contract to exchange one currency for
another on some future date at a specified exchange rate. In
certain circumstances, a "proxy currency" may be substituted for
the currency in which the investment is denominated, a strategy
known as "proxy hedging." Although foreign currency transactions
will be used primarily to protect the fund's foreign securities
from adverse currency movements relative to the dollar, they
involve the risk that anticipated currency movements will not
occur and the fund's total return could be reduced.
Lending of Portfolio Securities Like other mutual funds, the
fund may lend securities to broker-dealers, other institutions,
or other persons to earn additional income. The principal risk
is the potential insolvency of the broker-dealer or other
borrower. In this event, the fund could experience delays in
recovering its securities and possibly capital losses.
Fundamental policy: The value of loaned securities may not
exceed 33 1/3% of total fund assets.
When-Issued Securities and Forward Commitment Contracts The fund
may purchase securities on a when-issued or delayed delivery
basis or may purchase or sell securities on a forward commitment
basis. There is no limit on the fund's investment in these
securities. The price of these securities is fixed at the time
of the commitment to buy, but delivery and payment can take
place a month or more later. During the interim period, the
market value of the securities can fluctuate, and no interest
accrues to the purchaser. At the time of delivery, the value of
the securities may be more or less than the purchase or sale
price. To the extent the fund remains fully or almost fully
invested (in securities with a remaining maturity of more than
one year) at the same time it purchases these securities, there
will be greater fluctuations in the fund's net asset value than
if the fund did not purchase them.
Portfolio Turnover The fund will not generally trade in
securities (either common stocks or bonds) 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 cost may increase transaction costs and result in
additional taxable gains. The fund's portfolio turnover rates
for the fiscal periods ended December 31, 1996 and 1995 were
51.7% and 39.3%, respectively.
Credit-Quality Considerations The credit quality of most bond
issues is evaluated by rating agencies such as Moody's and
Standard & Poor's. Credit quality refers to the issuer's ability
to meet all required interest and principal payments. The
highest ratings are assigned to issuers perceived to be the best
credit risks. T. Rowe Price research analysts also evaluate all
portfolio holdings of the fund, including those rated by outside
agencies. The lower the rating on a bond, the higher the yield,
other things being equal.
Table 5 shows the rating scale used by the major rating
agencies. T. Rowe Price considers publicly available ratings,
but emphasizes its own credit analysis when selecting
investments.
Ratings of Corporate Debt Securities
Moody's Standard Fitch
Investor & Poor's Investors
Services Services, Inc. Services, Inc. Definition
Long-Term
Aaa AAA AAA Highest
quality
Aa AA AA High
quality
A A A Upper
medium
grade
Baa BBB BBB Medium
grade
Ba BB BB Specu-
lative
B B B Highly
specu-
lative
C Caa CCC, CC Vulner-
able
to default
C Ca C Default is
imminent
C D DDD, DD, D Probably in
default
Moody's S&P Fitch
Commercial Paper
P-1 Superior A-1+ F-1+ Exceptionally
quality Extremely strong quality
strong
quality
A-1 Strong F-1 Very strong
quality quality
P-2 Strong A-2 Satis- F-2 Good
quality factory credit quality
quality
P-3 Accept- A-3 Ade- F-3 Fair
able quate credit quality
quality quality
B Specu- F-S Weak
lative credit quality
quality
C Doubtful
quality
Table 5
Equity Income Portfolio
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 described in this section)
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,
including nondollar-denominated securities traded outside of the
U.S. and dollar-denominated securities of foreign issuers. 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).
To the extent the fund invests in developing countries, these
risks are increased.
Operating policy: The fund may invest up to 25% of its total
assets (excluding reserves) in foreign securities.
Fixed Income Securities The fund may invest in debt securities
of any type including municipal securities without regard to
quality or rating. Such securities would be purchased in
companies, municipalities, or entities which meet the investment
criteria for the fund. The price of a bond fluctuates with
changes in interest rates, rising when interest rates fall and
falling when interest rates rise.
High-Yield/High-Risk Investing The total return and yield of
lower-quality (high-yield/high-risk) bonds, commonly referred to
as "junk" bonds, can be expected to fluctuate more than the
total return and yield of higher-quality, shorter-term bonds,
but not as much as common stocks. Junk bonds (those rated below
BBB or in default) are regarded as predominantly speculative
with respect to the issuer's continuing ability to meet
principal and interest payments.
Operating policy: The fund will not purchase a
noninvestment-grade debt security (or junk bond) if immediately
after such purchase the fund would have more than 10% of its
total assets invested in such securities.
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.
Types of Management Practices
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 331_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 331_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.
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 the fund's foreign securities
from adverse currency movements relative to the dollar, they
involve the risk that anticipated currency movements will not
occur and the fund's total return could be reduced.
Lending of Portfolio Securities Like other mutual funds, the
fund may lend securities to broker-dealers, other institutions,
or other persons to earn additional income. The principal risk
is the potential insolvency of the broker-dealer or other
borrower. In this event, the fund could experience delays in
recovering its securities and possibly capital losses.
Fundamental policy: The value of loaned securities may not
exceed 33 1/3% of 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. The fund's portfolio turnover rate for
the fiscal years ended December 31, 1996 and 1995 were 17.4% and
10.1%, respectively. For the fiscal period ended December 31,
1994, the fund's annualized portfolio turnover rate was 21.3%.
Mid-Cap Growth Portfolio
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 described in this section)
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.
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.
Types of Management Practices
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 policy: 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.
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 policy: 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%.
New America Growth Portfolio
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 described in this section)
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,
including nondollar-denominated securities traded outside of the
U.S. and dollar-denominated securities of foreign issuers. 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).
To the extent the fund invests in developing countries, these
risks are increased.
Operating policy: The fund may invest up to 15% of its total
assets (excluding reserves) in foreign securities.
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.
Types of Management Practices
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 331_3% of total
fund assets.
Operating policy: 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.
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 policy: Futures: Initial margin deposits and premiums
on options used for non-hedging purposes will not equal more
than 5% of the fund's net asset value. Options on securities:
The total market value of securities against which the fund has
written call or put options may not exceed 25% of its total
assets. The fund will not commit more than 5% of its total
assets to premiums when purchasing call or put options.
Managing Foreign Currency Risk Investors in foreign securities
may "hedge" their exposure to potentially unfavorable currency
changes by purchasing a contract to exchange one currency for
another on some future date at a specified exchange rate. In
certain circumstances, a "proxy currency" may be substituted for
the currency in which the investment is denominated, a strategy
known as "proxy hedging." Although foreign currency transactions
will be used primarily to protect the fund's foreign securities
from adverse currency movements relative to the dollar, they
involve the risk that anticipated currency movements will not
occur and the fund's total return could be reduced.
Lending of Portfolio Securities Like other mutual funds, the
fund may lend securities to broker-dealers, other institutions,
or other persons to earn additional income. The principal risk
is the potential insolvency of the broker-dealer or other
borrower. In this event, the fund could experience delays in
recovering its securities and possibly capital losses.
Fundamental policy: The value of loaned securities may not
exceed 33 1/3% of 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. The fund's portfolio turnover rate for
the fiscal years ended December 31, 1996 and 1995 were 27.2% and
54.5%, respectively. For the fiscal period ended December 31,
1994, the fund's annualized portfolio turnover rate was 81.0%.
International Stock Portfolio
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 described in this section)
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).
Fixed Income Securities The fund may invest in any type of
investment-grade security. Such securities would be purchased in
companies which meet the investment criteria for the fund. The
price of a bond fluctuates with changes in interest rates,
rising when interest rates fall and falling when interest rates
rise.
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.
Passive Foreign Investment Companies The fund may purchase the
securities of certain foreign investment funds or trusts called
passive foreign investment companies. Such trusts have been the
only or primary way to invest in certain countries. In addition
to bearing their proportionate share of the trust's expenses
(management fees and operating expenses), shareholders will also
indirectly bear similar expenses of such trusts. Capital gains
on the sale of such holdings are considered ordinary income
regardless of how long the fund held 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.
To avoid such tax and interest, each Price-Fleming fund intends
to treat these securities as sold on the last day of its fiscal
year and recognize any gains for tax purposes at that time;
losses will not be recognized. Such gains will be considered
ordinary income, which the fund will be required to distribute
even though it has not sold the security.
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.
Types of Management Practices
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 policy: 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.
Foreign Currency Transactions The fund will normally conduct its
foreign currency exchange transactions either on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign currency
exchange market, or through entering into forward contracts to
purchase or sell foreign currencies. The fund will generally not
enter into a forward contract with a term greater than one year.
The fund will generally enter into forward foreign currency
exchange contracts only under two circumstances. First, when a
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. Second, when
Price-Fleming believes that the currency of a particular foreign
country may suffer or enjoy a substantial movement against
another currency, it may enter into a forward contract to sell
or buy the former foreign currency (or another currency which
acts as a proxy for that currency), approximating the value of
some or all of the fund's portfolio securities denominated in
such foreign currency. Under certain circumstances, the fund may
commit a substantial portion or the entire value of its
portfolio to the consummation of these contracts. Price-Fleming
will consider the effect such a commitment of its portfolio to
forward contracts would have on the investment program of the
fund and the flexibility of the fund to purchase additional
securities. Although forward contracts will be used primarily to
protect the fund from adverse currency movements, they also
involve the risk that anticipated currency movements will not be
accurately predicted and the fund's total return could be
adversely affected as a result.
There are certain markets where it is not possible to engage in
effective foreign currency hedging. This may be true, for
example, for the currencies of various Latin American countries
and other emerging markets where the foreign exchange markets
are not sufficiently developed to permit hedging activity to
take place.
Futures and Options Futures (a type of potentially high-risk
derivative) are often used to manage risk, because they enable
the investor to buy or sell an asset in the future at an agreed
upon price. Options (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 a
number of reasons, including: to manage its exposure to changes
in securities prices and foreign currencies; as an efficient
means of adjusting 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 investment in such
contracts. In many foreign countries, futures and options
markets do not exist or are not sufficiently developed to be
effectively used by the fund.
Operating policy: 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.
Tax Consequences of Hedging Under applicable tax law, the fund
may be required to limit its gains from hedging in foreign
currency forwards, futures, and options. Although the fund is
expected to comply with such limits, the extent to which these
limits apply is subject to tax regulations as yet unissued.
Hedging may also result in the application of the mark-to-market
and straddle provisions of the Internal Revenue Code. These
provisions could result in an increase (or decrease) in the
amount of taxable dividends paid by the fund and could affect
whether dividends paid by the fund are classified as capital
gains or ordinary income.
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. The fund's portfolio turnover rate for
the fiscal years ended December 31, 1996 and 1995 were 9.7% and
17.4%, respectively. For the fiscal period ended December 31,
1994, the fund's annualized portfolio turnover rate was 4.6%.
To help you achieve your financial goals, T. Rowe Price offers
a wide range of stock, bond, and money market investments, as
well as convenient services and timely, informative reports.
To Open a Mutual
Fund Account
T. Rowe Price
Investor Services
1-800-496-5304
For Existing Accounts
T. Rowe Price Variable
Annuity Service Center
1-800-469-6587
For Yields, Prices, Account Information, or to Conduct
Transactions
Tele*Access(registered trademark)
1-800-638-2587
24 hours, 7 days
Investor Centers
101 East Lombard St.
Baltimore, MD 21202
T. Rowe Price
Financial Center
10090 Red Run Blvd.
Owings Mills, MD 21117
Farragut Square
900 17th Street, N.W.
Washington, D.C. 20006
ARCO Tower
31st Floor
515 South Flower St.
Los Angeles, CA 90071
4200 West Cypress St.
10th Floor
Tampa, FL 33607
Invest With Confidence
T. Rowe Price
T. Rowe Price
Variable Annuity Service Center
P.O. Box 750440
Topeka, Kansas 66675-0440
K15-040 5/1/97
NATL TRP607 (5/97)
PAGE 2
Combined Statement of Additional Information for the T. Rowe
Price No-Load Variable Annuity, dated May 1, 1997, should be
inserted here.
Statement of Additional Information
for the "Funds"
May 1, 1997
The T. Rowe Price NoLoad Variable Annuity
Statement of Additional Information
STATEMENT OF ADDITIONAL INFORMATION
T. ROWE PRICE FIXED INCOME SERIES, INC.
T. Rowe Price Prime Reserve Portfolio
T. Rowe Price LimitedTerm Bond Portfolio
T. ROWE PRICE EQUITY SERIES, INC.
T. Rowe Price Personal Strategy Balanced Portfolio
T. Rowe Price Equity Income Portfolio
T. Rowe Price MidCap Growth Portfolio
T. Rowe Price New America Growth Portfolio
T. ROWE PRICE INTERNATIONAL SERIES, INC.
T. Rowe Price International Stock Portfolio
(the "Funds")
Shares of the Funds may be offered to insurance company
separate accounts (including the T. Rowe Price Variable
Annuity Account, a separate account of Security Benefit Life
Insurance Company ("Security Benefit")) established for the
purpose of funding variable annuity contracts. They may also
be offered to insurance company separate accounts established
for the purpose of funding variable life contracts. Variable
annuity and variable life Contract Holders or Participants
(including individuals purchasing the T. Rowe Price NoLoad
Variable Annuity) are not the shareholders of the Funds.
Rather, the separate account is the shareholder. The T. Rowe
Price NoLoad Variable Annuity contract is issued by Security
Benefit and described in the attached prospectus. The Funds
assume no responsibility for any insurance company
prospectuses or variable annuity or life contracts.
In the future, it is possible that the Funds may offer their
shares to separate accounts funding variable annuities,
variable life insurance or other insurance products of other
insurance companies.
This Statement of Additional Information is not a prospectus
but should be read in conjunction with the Funds' prospectuses
dated May 1, 1997, which may be obtained by contacting T. Rowe
Price Variable Annuity Service Center, P.O. Box 750440,
Topeka, Kansas, 666750440, 18004696587.
The date of this Statement of Additional Information is May 1,
1997.
Contents
16 AssetBacked Securities
72 Capital Stock
58 Code of Ethics
58 Custodian
57 Distributor for Fund
71 Dividends and Distributions
73 Federal Registration of Shares
38 Foreign Currency Transactions
37 Foreign Futures and Options
31 Futures Contracts
20 Hybrid Instruments
73 Independent Accountants
23 Illiquid or Restricted Securities
55 Investment Management Services
3 Investment Objectives and Policies
44 Investment Performance
9 Investment Program
40 Investment Restrictions
73 Legal Counsel
24 Lending of Portfolio Securities
46 Management of Fund
10 MortgageRelated Securities
69 Net Asset Value Per Share
25 Options
24 Portfolio Management Practices
59 Portfolio Transactions
68 Pricing of Securities
54 Principal Holders of Securities
75 Ratings of Commercial Paper
75 Ratings of Corporate Debt Securities
24 Repurchase Agreements
4 Risk Factors
71 Tax Status
23 Warrants
21 WhenIssued Securities and Forward Commitment
Contracts
44 Yield Information
Throughout this Statement of Additional Information, "the
Fund" is intended to refer to each Fund listed on the cover
page, unless otherwise indicated. References to "the Manager"
are intended to refer to T. Rowe Price when mentioned in
connection with the LimitedTerm Bond, Personal Strategy
Balanced, Equity Income, Prime Reserve, MidCap Growth, and New
America Growth Portfolios. References to "the Manager" refer
to RowePrice Fleming International, Inc. ("PriceFleming") when
mentioning the International Stock Portfolio. These
references are intended throughout this Statement of
Additional Information unless otherwise indicated.
Investment Objectives
and Policies
The following information supplements the discussion of each
Fund's investment objective and policies discussed in the
prospectus. Each Fund will not make a material change in its
investment objective without obtaining shareholder approval.
Unless otherwise specified, the investment program and
restrictions of the Funds are not fundamental policies. Each
Fund's operating policies are subject to change by the Board
of Directors without shareholder approval. However,
shareholders will be notified of a material change in an
operating policy. Each Fund's fundamental policies may not be
changed without the approval of at least a majority of the
outstanding shares of the Fund or, if it is less, 67% of the
shares represented at a meeting of shareholders at which the
holders of 50% or more of the shares are represented.
International Stock Portfolio
It is the present intention of PriceFleming to invest in
companies based in (or governments of or within) the Far East
(for example, Japan, Hong Kong, Singapore, and Malaysia),
Western Europe (for example, United Kingdom, Germany, Hungary,
Poland, Netherlands, France, Spain, and Switzerland), South
Africa, Australia, Canada, and such other areas and countries
as PriceFleming may determine from time to time.
In determining the appropriate distribution of investments
among various countries and geographic regions, PriceFleming
ordinarily considers the following factors: prospects for
relative economic growth between foreign countries; expected
levels of inflation; government policies influencing business
conditions; the outlook for currency relationships; and the
range of individual investment opportunities available to
international investors.
In analyzing companies for investment, PriceFleming ordinarily
looks for one or more of the following characteristics: an
aboveaverage earnings growth per share; high return on
invested capital; healthy balance sheet; sound financial and
accounting policies and overall financial strength; strong
competitive advantages; effective research and product
development and marketing; efficient service; pricing
flexibility; strength of management; and general operating
characteristics which will enable the companies to compete
successfully in their market place. While current dividend
income is not a prerequisite in the selection of portfolio
companies, the companies in which the Fund invests normally
will have a record of paying dividends, and will generally be
expected to increase the amounts of such dividends in future
years as earnings increase.
It is expected that the International Stock Portfolio's
investments will ordinarily be traded on exchanges located at
least in the respective countries in which the various issuers
of such securities are principally based.
Risk Factors
General
Each Fund's share price (except for Prime Reserve) will
fluctuate with market, economic and where applicable, foreign
exchange conditions, and your investment may be worth more or
less when redeemed than when purchased. No Fund should be
relied upon as a complete investment program, nor used to play
shortterm swings in the stock, bond, or foreign exchange
markets. Because of each Fund's investment policy, the Fund
may or may not be suitable or appropriate for all investors.
The Prime Reserve Fund is a money market fund whose primary
objective is principal stability. It seeks to maintain a
$1.00 price per share; however, this price is not guaranteed
or insured by the U.S. government and its yield is not fixed.
There is risk in all investments. The value of the portfolio
securities of the Funds will fluctuate based upon market
conditions. Although the Funds seek to reduce risk by
investing in diversified portfolios, such diversification does
not eliminate all risk. There can, of course, be no assurance
that any Fund will achieve its investment objective.
Reference is also made to the sections entitled "Types of
Securities" and "Portfolio Management Practices" for
discussions of the risks associated with the investments and
practices described therein as they apply to the Funds.
Debt Obligations (All Funds Except New America Growth, MidCap
Growth, and International Stock)
Yields on short, intermediate, and longterm securities are
dependent on a variety of factors, including the general
conditions of the money and bond markets, the size of a
particular offering, the maturity of the obligation, and the
credit quality and rating of the issue. Debt securities with
longer maturities tend to have higher yields and are generally
subject to potentially greater capital appreciation and
depreciation than obligations with shorter maturities and
lower yields. The market prices of debt securities usually
vary, depending upon available yields. An increase in
interest rates will generally reduce the value of portfolio
debt securities, and a decline in interest rates will
generally increase the value of portfolio debt securities.
The ability of the Fund to achieve its investment objective is
also dependent on the continuing ability of the issuers of the
debt securities in which the Fund invests to meet their
obligations for the payment of interest and principal when
due. Although the Fund seeks to reduce risk by portfolio
diversification, credit analysis (considered by the Manager to
be among the strongest in the investment management industry),
and attention to trends in the economy, industries and
financial markets, such efforts will not eliminate all risk.
There can, of course, be no assurance that any Fund will
achieve its investment objective.
After purchase by the Fund, a security may cease to be rated
or its rating may be reduced below the minimum required for
purchase by the Fund. Neither event will require a sale of
such security by the Fund. The Fund will follow the
procedures set forth in Rule 2a7 under the Investment Company
Act of 1940 in its determination of whether it could continue
to hold the security. To the extent that the ratings given by
Moody's or S&P may change as a result of changes in such
organizations or their rating systems, the Fund will attempt
to use comparable ratings as standards for investments in
accordance with the investment policies contained in the
prospectus. When purchasing unrated securities, the Manager,
under the supervision of each Fund's Board of Directors,
determines whether the unrated security is of a quality
comparable to that which the Fund is allowed to purchase.
LimitedTerm Bond and Personal Strategy Balanced Portfolios
Mortgage securities differ from conventional bonds in that
principal is paid back over the life of the security rather
than at maturity. As a result, the holder of a mortgage
security (i.e., the Fund) receives monthly scheduled payments
of principal and interest, and may receive unscheduled
principal payments representing prepayments on the underlying
mortgages. The incidence of unscheduled principal prepayments
is also likely to increase in mortgage pools owned by the Fund
when prevailing mortgage loan rates fall below the mortgage
rates of the securities underlying the individual pool. The
effect of such prepayments in a falling rate environment is to
(1) cause the Fund to reinvest principal payments at the then
lower prevailing interest rate, and (2) reduce the potential
for capital appreciation beyond the face amount of the
security. Conversely, the Fund may realize a gain on
prepayments of mortgage pools trading at a discount. Such
prepayments will provide an early return of principal which
may then be reinvested at the then higher prevailing interest
rate.
The market value of adjustable rate mortgage securities
("ARMs"), like other U.S. government securities, will
generally vary inversely with changes in market interest
rates, declining when interest rates rise and rising when
interest rates decline. Because of their periodic adjustment
feature, ARMs should be more sensitive to shortterm interest
rates than longterm rates. They should also display less
volatility than longterm mortgage securities. Thus, while
having less risk of a decline during periods of rapidly rising
rates, ARMs may also have less potential for capital
appreciation than other investments of comparable maturities.
Interest rate caps on mortgages underlying ARM securities may
prevent income on the ARM from increasing to prevailing
interest rate levels and cause the securities to decline in
value. In addition, to the extent ARMs are purchased at a
premium, mortgage foreclosures and unscheduled principal
prepayments may result in some loss of the holders' principal
investment to the extent of the premium paid. On the other
hand, if ARMs are purchased at a discount, both a scheduled
payment of principal and an unscheduled prepayment of
principal will increase current and total returns and will
accelerate the recognition of income which when distributed to
shareholders will be taxable as ordinary income.
Risk Factors of Foreign Investing (All Funds Except Prime
Reserve)
There are special risks in foreign investing. 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 selfsufficiency and balance of payments position.
The internal politics of certain foreign countries are not as
stable as in the United States. For example, in 1991, the
existing government in Thailand was overthrown in a military
coup. In 1992, there were two military coup attempts in
Venezuela and in 1992 the President of Brazil was impeached.
In addition, significant external political risks currently
affect some foreign countries. Both Taiwan and China still
claim sovereignty of one another and there is a demilitarized
border between North and South Korea.
Governments in certain foreign countries continue to
participate to a significant degree, through ownership
interest or regulation, in their respective economies. Action
by these governments could have a significant effect on market
prices of securities and payment of dividends. The economies
of many foreign countries are heavily dependent upon
international trade and are accordingly affected by protective
trade barriers and economic conditions of their trading
partners. The enactment by these trading partners of
protectionist trade legislation could have a significant
adverse effect upon the securities markets of such countries.
Currency Fluctuations. The Funds will invest in securities
denominated in various currencies. Accordingly, a change in
the value of any such currency against the U.S. dollar will
result in a corresponding change in the U.S. dollar value of
the Funds' assets denominated in that currency. Such changes
will also affect the Funds' income. Generally, when a given
currency appreciates against the dollar (the dollar weakens)
the value of the Fund's securities denominated in that
currency will rise. When a given currency depreciates against
the dollar (the dollar strengthens) the value of the Funds'
securities denominated in that currency would be expected to
decline.
Investment and Repatriation of Restrictions. Foreign
investment in the securities markets of certain foreign
countries is restricted or controlled in varying degrees.
These restrictions may limit at times and preclude investment
in certain of such countries and may increase the cost and
expenses of the Funds. Investments by foreign investors are
subject to a variety of restrictions in many developing
countries. These restrictions may take the form of prior
governmental approval, limits on the amount or type of
securities held by foreigners, and limits on the types of
companies in which foreigners may invest. Additional or
different restrictions may be imposed at any time by these or
other countries in which the Funds invest. In addition, the
repatriation of both investment income and capital from
several foreign countries is restricted and controlled under
certain regulations, including in some cases the need for
certain government consents. For example, capital invested in
Chile normally cannot be repatriated for one year.
Market Characteristics. Foreign stock and bond markets are
generally not as developed or efficient as, and may be more
volatile than, those in the United States. While growing in
volume, they usually have substantially less volume than U.S.
markets and the Funds' portfolio securities may be less liquid
and subject to more rapid and erratic price movements than
securities of comparable U.S. companies. Equity securities
may trade at price/earnings multiples higher than comparable
United States securities and such levels may not be
sustainable. Fixed commissions on foreign stock exchanges are
generally higher than negotiated commissions on United States
exchanges, although the Funds will endeavor to achieve the
most favorable net results on their portfolio transactions.
There is generally less government supervision and regulation
of foreign stock exchanges, brokers and listed companies than
in the United States. Moreover, settlement practices for
transactions in foreign markets may differ from those in
United States markets. Such differences may include delays
beyond periods customary in the United States and practices,
such as delivery of securities prior to receipt of payment,
which increase the likelihood of a "failed settlement."
Failed settlements can result in losses to the Fund.
Investment Funds. Each Fund may invest in investment funds
which have been authorized by the governments of certain
countries specifically to permit foreign investment in
securities of companies listed and traded on the stock
exchanges in these respective countries. The Fund's
investment in these funds is subject to the provisions of the
1940 Act. If the Funds invest in such investment funds, the
Fund's shareholders will bear not only their proportionate
share of the expenses of the Fund (including operating
expenses and the fees of the investment manager), but also
will bear indirectly similar expenses of the underlying
investment funds. In addition, the securities of these
investment funds may trade at a premium over their net asset
value.
Information and Supervision. There is generally less publicly
available information about foreign companies comparable to
reports and ratings that are published about companies in the
United States. Foreign companies are also generally not
subject to uniform accounting, auditing and financial
reporting standards, practices and requirements comparable to
those applicable to United States companies. It also may be
more difficult to keep currently informed of corporate actions
which affect the prices of portfolio securities.
Taxes. The dividends and interest payable on certain of the
Funds' foreign portfolio securities may be subject to foreign
withholding taxes, thus reducing the net amount of income
available for distribution to the Funds' shareholders.
Other. With respect to certain foreign countries, especially
developing and emerging ones, there is the possibility of
adverse changes in investment or exchange control regulations,
expropriation or confiscatory taxation, limitations on the
removal of funds or other assets of the Funds, political or
social instability, or diplomatic developments which could
affect investments by U.S. persons in those countries.
Eastern Europe and Russia. Changes occurring in Eastern Europe
and Russia today could have longterm 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 centrallyplanned
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 quasigovernmental authorities to
act as custodian of the Fund's assets invested in such
countries and these authorities may not qualify as a foreign
custodian under the Investment Company Act of 1940 and
exemptive relief from such Act may be required. All of these
considerations are among the factors which could cause
significant risks and uncertainties to investment in Eastern
Europe and Russia. Each Fund will only invest in a company
located in, or a government of, Eastern Europe and Russia, if
it believes the potential return justifies the risk. To the
extent any securities issued by companies in Eastern Europe
and Russia are considered illiquid, each Fund will be required
to include such securities within its 15% restriction on
investing in illiquid securities.
Latin America
To the extent the Fund invests in Latin America, such
investments will be subject to the factors discussed below.
Inflation. Most Latin American countries have experienced, at
one time or another, severe and persistent levels of
inflation, including, in some cases, hyperinflation. This
has, in turn, led to high interest rates, extreme measures by
governments to keep inflation in check and a generally
debilitating effect on economic growth. Although inflation in
many countries has lessened, there is no guarantee it will
remain at lower levels.
Political Instability. The political history of certain Latin
American countries has been characterized by political
uncertainty, intervention by the military in civilian and
economic spheres, and political corruption. Such
developments, if they were to reoccur, could reverse favorable
trends toward market and economic reform, privatization and
removal of trade barriers and result in significant disruption
in securities markets.
Foreign Currency. Certain Latin American countries may have
managed currencies which are maintained at artificial levels
to the U.S. dollar rather than at levels determined by the
market. This type of system can lead to sudden and large
adjustments in the currency which, in turn, can have a
disruptive and negative effect on foreign investors. For
example, in late 1994 the value of the Mexican peso lost more
than onethird of its value relative to the dollar. Certain
Latin American countries also may restrict the free conversion
of their currency into foreign currencies, including the U.S.
dollar. There is no significant foreign exchange market for
certain currencies and it would, as a result, be difficult for
the Fund to engage in foreign currency transactions designed
to protect the value of the Fund's interests in securities
denominated in such currencies.
Sovereign Debt. A number of Latin American countries are among
the largest debtors of developing countries. There have been
moratoria on, and reschedulings of, repayment with respect to
these debts. Such events can restrict the flexibility of
these debtor nations in the international markets and result
in the imposition of onerous conditions on their economies.
Special Risks of Investing in Junk Bonds (LimitedTerm Bond,
Personal Strategy Balanced, and Equity Income Funds)
The following special considerations are additional risk
factors associated with the Fund's investments in lower rated
debt securities.
Youth and Growth of the Lower Rated Debt Securities Market.
The market for lower rated debt securities is relatively new
and its growth has paralleled a long economic expansion. Past
experience may not, therefore, provide an accurate indication
of future performance of this market, particularly during
periods of economic recession. An economic downturn or
increase in interest rates is likely to have a greater
negative effect on this market, the value of lower rated debt
securities in the Fund's portfolio, the Fund's net asset value
and the ability of the bonds' issuers to repay principal and
interest, meet projected business goals and obtain additional
financing than on higher rated securities. These
circumstances also may result in a higher incidence of
defaults than with respect to higher rated securities. An
investment in this Fund is more speculative than investment in
shares of a fund which invests only in higher rated debt
securities.
Sensitivity to Interest Rate and Economic Changes. Prices of
lower rated debt securities may be more sensitive to adverse
economic changes or corporate developments than higher rated
investments. Debt securities with longer maturities, which
may have higher yields, may increase or decrease in value more
than debt securities with shorter maturities. Market prices
of lower rated debt securities structured as zero coupon or
payinkind securities are affected to a greater extent by
interest rate changes and may be more volatile than securities
which pay interest periodically and in cash. Where it deems
it appropriate and in the best interests of Fund shareholders,
the Fund may incur additional expenses to seek recovery on a
debt security on which the issuer has defaulted and to pursue
litigation to protect the interests of security holders of its
portfolio companies.
Liquidity and Valuation. Because the market for lower rated
securities may be thinner and less active than for higher
rated securities, there may be market price volatility for
these securities and limited liquidity in the resale market.
Nonrated securities are usually not as attractive to as many
buyers as rated securities are, a factor which may make
nonrated securities less marketable. These factors may have
the effect of limiting the availability of the securities for
purchase by the Fund and may also limit the ability of the
Fund to sell such securities at their fair value either to
meet redemption requests or in response to changes in the
economy or the financial markets. Adverse publicity and
investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of lower rated
debt securities, especially in a thinly traded market. To the
extent the Fund owns or may acquire illiquid or restricted
lower rated securities, these securities may involve special
registration responsibilities, liabilities and costs, and
liquidity and valuation difficulties. Changes in values of
debt securities which the Fund owns will affect its net asset
value per share. If market quotations are not readily
available for the Fund's lower rated or nonrated securities,
these securities will be valued by a method that the Fund's
Board of Directors believes accurately reflects fair value.
Judgment plays a greater role in valuing lower rated debt
securities than with respect to securities for which more
external sources of quotations and last sale information are
available.
Taxation. Special tax considerations are associated with
investing in lower rated debt securities structured as zero
coupon or payinkind securities. The Fund accrues income on
these securities prior to the receipt of cash payments. The
Fund must distribute substantially all of its income to its
shareholders to qualify for passthrough treatment under the
tax laws and may, therefore, have to dispose of its portfolio
securities to satisfy distribution requirements.
Investment Program
Types of Securities
Set forth below is additional information about certain of the
investments described in each Fund's prospectus.
Debt Securities (LimitedTerm Bond and Personal Strategy
Balanced Funds)
Fixed income securities in which the Fund may invest include,
but are not limited to, those described on the following
pages.
o U.S. Government Obligations. Bills, notes, bonds and
other debt securities issued by the U.S. Treasury. These
are direct obligations of the U.S. Government and differ
mainly in the length of their maturities.
o U.S. Government Agency Securities. Issued or guaranteed
by U.S. Government sponsored enterprises and federal
agencies. These include securities issued by the Federal
National Mortgage Association, Government National
Mortgage Association, Federal Home Loan Bank, Federal
Land Banks, Farmers Home Administration, Banks for
Cooperatives, Federal Intermediate Credit Banks, Federal
Financing Bank, Farm Credit Banks, the Small Business
Association, and the Tennessee Valley Authority. Some of
these securities are supported by the full faith and
credit of the U.S. Treasury; and the remainder are
supported only by the credit of the instrumentality,
which may or may not include the right of the issuer to
borrow from the Treasury.
o Bank Obligations. Certificates of deposit, bankers'
acceptances, and other shortterm debt obligations.
Certificates of deposit are shortterm obligations of
commercial banks. A bankers' acceptance is a time draft
drawn on a commercial bank by a borrower, usually in
connection with international commercial transactions.
Certificates of deposit may have fixed or variable rates.
The Fund may invest in U.S. banks, foreign branches of
U.S. banks, U.S. branches of foreign banks, and foreign
branches of foreign banks.
o Corporate Debt Securities. Outstanding nonconvertible
corporate debt securities (e.g., bonds and debentures).
Corporate notes may have fixed, variable, or floating
rates.
o Commercial Paper. Shortterm promissory notes issued by
corporations primarily to finance shortterm credit needs.
Certain notes may have floating or variable rates.
o Foreign Government Securities. Issued or guaranteed by a
foreign government, province, instrumentality, political
subdivision or similar unit thereof.
o Savings and Loan Obligations. Negotiable certificates of
deposit and other shortterm debt obligations of savings
and loan associations.
o Supranational Agencies. Securities of certain
supranational entities, such as the International
Development Bank.
MortgageRelated Securities (LimitedTerm Bond and Personal
Strategy Balanced Funds)
Mortgagerelated securities in which each Fund may invest
include, but are not limited to, those described below.
o MortgageBacked Securities. Mortgagebacked securities are
securities representing an interest in a pool of
mortgages. The mortgages may be of a variety of types,
including adjustable rate, conventional 30year fixed
rate, graduated payment, and 15year. Principal and
interest payments made on the mortgages in the underlying
mortgage pool are passed through to the Fund. This is in
contrast to traditional bonds where principal is normally
paid back at maturity in a lump sum. Unscheduled
prepayments of principal shorten the securities' weighted
average life and may lower their total return. (When a
mortgage in the underlying mortgage pool is prepaid, an
unscheduled principal prepayment is passed through to the
Fund. This principal is returned to the Fund at par. As
a result, if a mortgage security were trading at a
premium, its total return would be lowered by
prepayments, and if a mortgage security were trading at
a discount, its total return would be increased by
prepayments.) The value of these securities also may
change because of changes in the market's perception of
the creditworthiness of the federal agency that issued
them. In addition, the mortgage securities market in
general may be adversely affected by changes in
governmental regulation or tax policies.
o U.S. Government Agency MortgageBacked Securities. These
are obligations issued or guaranteed by the United States
Government or one of its agencies or instrumentalities,
such as the Government National Mortgage Association
("Ginnie Mae" or "GNMA"), the Federal National Mortgage
Association ("Fannie Mae" or "FNMA") and the Federal Home
Loan Mortgage Corporation ("Freddie Mac" or "FHLMC").
FNMA and FHLMC obligations are not backed by the full
faith and credit of the U.S. Government as GNMA
certificates are, but FNMA and FHLMC securities are
supported by the instrumentality's right to borrow from
the United States Treasury. U.S. Government Agency
MortgageBacked Certificates provide for the passthrough
to investors of their pro rata share of monthly payments
(including any prepayments) made by the individual
borrowers on the pooled mortgage loans, net of any fees
paid to the guarantor of such securities and the servicer
of the underlying mortgage loans. Each of GNMA, FNMA and
FHLMC guarantees timely distributions of interest to
certificate holders. GNMA and FNMA guarantee timely
distributions of scheduled principal. FHLMC has in the
past guaranteed only the ultimate collection of principal
of the underlying mortgage loan; however, FHLMC now
issues MortgageBacked Securities (FHLMC Gold PCs) which
also guarantee timely payment of monthly principal
reductions.
o Ginnie Mae Certificates. Ginnie Mae is a whollyowned
corporate instrumentality of the United States within the
Department of Housing and Urban Development. The
National Housing Act of 1934, as amended (the "Housing
Act"), authorizes Ginnie Mae to guarantee the timely
payment of the principal of and interest on certificates
that are based on and backed by a pool of mortgage loans
insured by the Federal Housing Administration under the
Housing Act, or Title V of the Housing Act of 1949 ("FHA
Loans"), or guaranteed by the Department of Veterans
Affairs under the Servicemen's Readjustment Act of 1944,
as amended ("VA Loans"), or by pools of other eligible
mortgage loans. The Housing Act provides that the full
faith and credit of the United States government is
pledged to the payment of all amounts that may be
required to be paid under any guaranty. In order to meet
its obligations under such guaranty, Ginnie Mae is
authorized to borrow from the United States Treasury with
no limitations as to amount.
o Fannie Mae Certificates. Fannie Mae is a federally
chartered and privately owned corporation organized and
existing under the Federal National Mortgage Association
Charter Act of 1938. FNMA Certificates represent a
prorata interest in a group of mortgage loans purchased
by Fannie Mae. FNMA guarantees the timely payment of
principal and interest on the securities it issues. The
obligations of FNMA are not backed by the full faith and
credit of the U.S. government.
o Freddie Mac Certificates. Freddie Mac is a corporate
instrumentality of the United States created pursuant to
the Emergency Home Finance Act of 1970, as amended (the
"FHLMC Act"). Freddie Mac Certificates represent a
prorata interest in a group of mortgage loans (a "Freddie
Mac Certificate group") purchased by Freddie Mac.
Freddie Mac guarantees timely payment of interest and
principal on certain securities it issues and timely
payment of interest and eventual payment of principal on
other securities it issues. The obligations of Freddie
Mac are obligations solely of Freddie Mac and are not
backed by the full faith and credit of the U.S.
Government.
When mortgages in the pool underlying a MortgageBacked
Security are prepaid by mortgagors or by result of
foreclosure, such principal payments are passed through
to the certificate holders. Accordingly, the life of the
MortgageBacked Security is likely to be substantially
shorter than the stated maturity of the mortgages in the
underlying pool. Because of such variation in prepayment
rates, it is not possible to predict the life of a
particular MortgageBacked Security, but FHA statistics
indicate that 25 to 30year single family dwelling
mortgages have an average life of approximately 12 years.
The majority of Ginnie Mae Certificates are backed by
mortgages of this type, and, accordingly, the generally
accepted practice treats Ginnie Mae Certificates as
30year securities which prepay full in the 12th year.
FNMA and Freddie Mac Certificates may have differing
prepayment characteristics.
Fixed Rate MortgageBacked Securities bear a stated
"coupon rate" which represents the effective mortgage
rate at the time of issuance, less certain fees to GNMA,
FNMA, and FHLMC for providing the guarantee, and the
issuer for assembling the pool and for passing through
monthly payments of interest and principal.
Payments to holders of MortgageBacked Securities consist
of the monthly distributions of interest and principal
less the applicable fees. The actual yield to be earned
by a holder of MortgageBacked Securities is calculated by
dividing interest payments by the purchase price paid for
the MortgageBacked Securities (which may be at a premium
or a discount from the face value of the certificate).
Monthly distributions of interest, as contrasted to
semiannual distributions which are common for other fixed
interest investments, have the effect of compounding and
thereby raising the effective annual yield earned on
MortgageBacked Securities. Because of the variation in
the life of the pools of mortgages which back various
MortgageBacked Securities, and because it is impossible
to anticipate the rate of interest at which future
principal payments may be reinvested, the actual yield
earned from a portfolio of MortgageBacked Securities will
differ significantly from the yield estimated by using an
assumption of a certain life for each MortgageBacked
Security included in such a portfolio as described above.
o U.S. Government Agency MultiClass PassThrough Securities.
Unlike CMOs, U.S. Government Agency MultiClass
PassThrough Securities, which include FNMA Guaranteed
REMIC PassThrough Certificates and FHLMC MultiClass
Mortgage Participation Certificates, are ownership
interests in a pool of Mortgage Assets. Unless the
context indicates otherwise, all references herein to
CMOs include multiclass passthrough securities.
o MultiClass Residential Mortgage Securities. Such
securities represent interests in pools of mortgage loans
to residential home buyers made by commercial banks,
savings and loan associations or other financial
institutions. Unlike GNMA, FNMA and FHLMC securities,
the payment of principal and interest on MultiClass
Residential Mortgage Securities is not guaranteed by the
U.S. Government or any of its agencies. Accordingly,
yields on MultiClass Residential Mortgage Securities have
been historically higher than the yields on U.S.
government mortgage securities. However, the risk of
loss due to default on such instruments is higher since
they are not guaranteed by the U.S. Government or its
agencies. Additionally, pools of such securities may be
divided into senior or subordinated segments. Although
subordinated mortgage securities may have a higher yield
than senior mortgage securities, the risk of loss of
principal is greater because losses on the underlying
mortgage loans must be borne by persons holding
subordinated securities before those holding senior
mortgage securities.
o PrivatelyIssued MortgageBacked Certificates. These are
passthrough certificates issued by nongovernmental
issuers. Pools of conventional residential mortgage
loans created by such issuers generally offer a higher
rate of interest than government and governmentrelated
pools because there are no direct or indirect government
guarantees of payment. Timely payment of interest and
principal of these pools is, however, generally supported
by various forms of insurance or guarantees, including
individual loan, title, pool and hazard insurance. The
insurance and guarantees are issued by government
entities, private insurance or the mortgage poolers.
Such insurance and guarantees and the creditworthiness of
the issuers thereof will be considered in determining
whether a mortgagerelated security meets the Fund's
quality standards. The Fund may buy mortgagerelated
securities without insurance or guarantees if through an
examination of the loan experience and practices of the
poolers, the investment manager determines that the
securities meet the Fund's quality standards.
o Collateralized Mortgage Obligations (CMOs). CMOs are
bonds that are collateralized by whole loan mortgages or
mortgage passthrough securities. The bonds issued in a
CMO deal are divided into groups, and each group of bonds
is referred to as a "tranche." Under the traditional CMO
structure, the cash flows generated by the mortgages or
mortgage passthrough securities in the collateral pool
are used to first pay interest and then pay principal to
the CMO bondholders. The bonds issued under a CMO
structure are retired sequentially as opposed to the pro
rata return of principal found in traditional passthrough
obligations. Subject to the various provisions of
individual CMO issues, the cash flow generated by the
underlying collateral (to the extent it exceeds the
amount required to pay the stated interest) is used to
retire the bonds. Under the CMO structure, the repayment
of principal among the different tranches is prioritized
in accordance with the terms of the particular CMO
issuance. The "fastestpay" tranche of bonds, as
specified in the prospectus for the issuance, would
initially receive all principal payments. When that
tranche of bonds is retired, the next tranche, or
tranches, in the sequence, as specified in the
prospectus, receive all of the principal payments until
they are retired. The sequential retirement of bond
groups continues until the last tranche, or group of
bonds, is retired. Accordingly, the CMO structure allows
the issuer to use cash flows of long maturity, monthlypay
collateral to formulate securities with short,
intermediate and long final maturities and expected
average lives.
In recent years, new types of CMO structures have
evolved. These include floating rate CMOs, planned
amortization classes, accrual bonds and CMO residuals.
These newer structures affect the amount and timing of
principal and interest received by each tranche from the
underlying collateral. Under certain of these new
structures, given classes of CMOs have priority over
others with respect to the receipt of prepayments on the
mortgages. Therefore, depending on the type of CMOs in
which the Fund invests, the investment may be subject to
a greater or lesser risk of prepayment than other types
of mortgagerelated securities.
The primary risk of any mortgage security is the
uncertainty of the timing of cash flows. For CMOs, the
primary risk results from the rate of prepayments on the
underlying mortgages serving as collateral. An increase
or decrease in prepayment rates (resulting from a
decrease or increase in mortgage interest rates) will
affect the yield, average life and price of CMOs. The
prices of certain CMOs, depending on their structure and
the rate of prepayments, can be volatile. Some CMOs may
also not be as liquid as other securities.
o Stripped Agency MortgageBacked Securities. Stripped
Agency MortgageBacked securities represent interests in
a pool of mortgages, the cash flow of which has been
separated into its interest and principal components.
"IOs" (interest only securities) receive the interest
portion of the cash flow while "POs" (principal only
securities) receive the principal portion. Stripped
Agency MortgageBacked Securities may be issued by U.S.
Government Agencies or by private issuers similar to
those described below with respect to CMOs and
privatelyissued mortgagebacked certificates. As interest
rates rise and fall, the value of IOs tends to move in
the same direction as interest rates. The value of the
other mortgagebacked securities described herein, like
other debt instruments, will tend to move in the opposite
direction compared to interest rates. Under the Internal
Revenue Code of 1986, as amended (the "Code"), POs may
generate taxable income from the current accrual of
original issue discount, without a corresponding
distribution of cash to the Fund.
The cash flows and yields on IO and PO classes are
extremely sensitive to the rate of principal payments
(including prepayments) on the related underlying
mortgage assets. For example, a rapid or slow rate of
principal payments may have a material adverse effect on
the prices of IOs or POs, respectively. If the
underlying mortgage assets experience greater than
anticipated prepayments of principal, an investor may
fail to recoup fully its initial investment in an IO
class of a stripped mortgagebacked security, even if the
IO class is rated AAA or Aaa or is derived from a full
faith and credit obligation. Conversely, if the
underlying mortgage assets experience slower than
anticipated prepayments of principal, the price on a PO
class will be affected more severely than would be the
case with a traditional mortgagebacked security.
The staff of the Securities and Exchange Commission has
advised the Fund that it believes the Fund should treat
IOs and POs, other than governmentissued IOs or POs
backed by fixed rate mortgages, as illiquid securities
and, accordingly, limit its investments in such
securities, together with all other illiquid securities,
to 15% of the Fund's net assets. Under the Staff's
position, the determination of whether a particular
governmentissued IO and PO backed by fixed rate mortgages
may be made on a case by case basis under guidelines and
standards established by the Fund's Board of
Directors/Trustees. The Fund's Board of
Directors/Trustees has delegated to T. Rowe Price the
authority to determine the liquidity of these investments
based on the following guidelines: the type of issuer;
type of collateral, including age and prepayment
characteristics; rate of interest on coupon relative to
current market rates and the effect of the rate on the
potential for prepayments; complexity of the issue's
structure, including the number of tranches; size of the
issue and the number of dealers who make a market in the
IO or PO. The Fund will treat nongovernmentissued IOs and
POs not backed by fixed or adjustable rate mortgages as
illiquid unless and until the Securities and Exchange
Commission modifies its position.
o Adjustable Rate Mortgages. Adjustable rate mortgage (ARM)
securities are collateralized by adjustable rate, rather
than fixed rate, mortgages.
ARMs, like fixed rate mortgages, have a specified
maturity date, and the principal amount of the mortgage
is repaid over the life of the mortgage. Unlike fixed
rate mortgages, the interest rate on ARMs is adjusted at
regular intervals based on a specified, published
interest rate "index" such as a Treasury rate index. The
new rate is determined by adding a specific interest
amount, the "margin," to the interest rate of the index.
Investment in ARM securities allows the Fund to
participate in changing interest rate levels through
regular adjustments in the coupons of the underlying
mortgages, resulting in more variable current income and
lower price volatility than longer term fixed rate
mortgage securities. The ARM securities in which the
Fund expects to invest will generally adjust their
interest rates at regular intervals of one year or less.
ARM securities are a less effective means of locking in
longterm rates than fixed rate mortgages since the income
from adjustable rate mortgages will increase during
periods of rising interest rates and decline during
periods of falling rates.
o Characteristics of Adjustable Rate Mortgage Securities
Interest Rate Indices. The interest rates paid on
adjustable rate securities are readjusted periodically to
an increment over some predetermined interest rate index.
Such readjustments occur at intervals ranging from one to
60 months. There are three main categories of indexes:
(1) those based on U.S. Treasury securities (2) those
derived from a calculated measure such as a cost of funds
index ("COFI") or a moving average of mortgage rates and
(3) those based on actively traded or prominently posted
shortterm, interest rates. Commonly utilized indexes
include the oneyear, threeyear, and fiveyear constant
maturity Treasury rates, the threemonth Treasury bill
rate, the 180day Treasury bill rate, rates on longerterm
Treasury securities, the 11th District Federal Home Loan
Bank Cost of Funds, the National Median Cost of Funds,
the onemonth, threemonth, sixmonth, or oneyear London
Interbank Offered Rate (LIBOR), the prime rate of a
specific bank, or commercial paper rates. Some indexes,
such as the oneyear constant maturity Treasury rate,
closely mirror changes in market interest rate levels.
Others, such as the 11th District Home Loan Bank Cost of
Funds index, tend to lag behind changes in market rate
levels. The market value of the Fund's assets and of the
net asset value of the Fund's shares will be affected by
the length of the adjustment period, the degree of
volatility in the applicable indexes and the maximum
increase or decrease of the interest rate adjustment on
any one adjustment date, in any one year and over the
life of the securities. These maximum increases and
decreases are typically referred to as "caps" and
"floors," respectively.
A number of factors affect the performance of the Cost of
Funds Index and may cause the Cost of Funds Index to move
in a manner different from indices based upon specific
interest rates, such as the One Year Treasury Index.
Additionally, there can be no assurance that the Cost of
Funds Index will necessarily move in the same direction
or at the same rate as prevailing interest rates.
Furthermore, any movement in the Cost of Funds Index as
compared to other indices based upon specific interest
rates may be affected by changes instituted by the FHLB
of San Francisco in the method used to calculate the Cost
of Funds Index. To the extent that the Cost of Funds
Index may reflect interest changes on a more delayed
basis than other indices, in a period of rising interest
rates, any increase may produce a higher yield later than
would be produced by such other indices, and in a period
of declining interest rates, the Cost of Funds Index may
remain higher than other market interest rates which may
result in a higher level of principal prepayments on
mortgage loans which adjust in accordance with the Cost
of Funds Index than mortgage loans which adjust in
accordance with other indices.
LIBOR, the London interbank offered rate, is the interest
rate that the most creditworthy international banks
dealing in U.S. dollardenominated deposits and loans
charge each other for large dollardenominated loans.
LIBOR is also usually the base rate for large
dollardenominated loans in the international market.
LIBOR is generally quoted for loans having rate
adjustments at one, three, six or 12 month intervals.
o Caps and Floors. ARMs will frequently have caps and
floors which limit the maximum amount by which the
interest rate to the residential borrower may move up or
down, respectively, each adjustment period and over the
life of the loan. Interest rate caps on ARM securities
may cause them to decrease in value in an increasing
interest rate environment. Such caps may also prevent
their income from increasing to levels commensurate with
prevailing interest rates. Conversely, interest rate
floors on ARM securities may cause their income to remain
higher than prevailing interest rate levels and result in
an increase in the value of such securities. However,
this increase may be tempered by the acceleration of
prepayments.
Mortgage securities generally have a maximum maturity of
up to 30 years. However, due to the adjustable rate
feature of ARM securities, their prices are considered to
have volatility characteristics which approximate the
average period of time until the next adjustment of the
interest rate. As a result, the principal volatility of
ARM securities may be more comparable to short and
intermediateterm securities than to longer term fixed
rate mortgage securities. Prepayments however, will
increase their principal volatility. See also the
discussion of MortgageBacked Securities on page 10.
o Other Mortgage Related Securities. The Fund expects that
governmental, governmentrelated, or private entities may
create mortgage loan pools offering passthrough
investments in addition to those described above. The
mortgages underlying these securities may be alternative
mortgage instruments, that is, mortgage instruments whose
principal or interest payments may vary or whose terms to
maturity may differ from customary longterm fixed rate
mortgages. As new types of mortgagerelated securities
are developed and offered to investors, the investment
manager will, consistent with the Fund's objective,
policies and quality standards, consider making
investments in such new types of securities.
AssetBacked Securities (LimitedTerm Bond and Personal Strategy
Balanced Funds)
The credit quality of most assetbacked securities depends
primarily on the credit quality of the assets underlying such
securities, how well the entity issuing the security is
insulated from the credit risk of the originator or any other
affiliated entities and the amount and quality of any credit
support provided to the securities. The rate of principal
payment on assetbacked securities generally depends on the
rate of principal payments received on the underlying assets
which in turn may be affected by a variety of economic and
other factors. As a result, the yield on any assetbacked
security is difficult to predict with precision and actual
yield to maturity may be more or less than the anticipated
yield to maturity. Assetbacked securities may be classified
as passthrough certificates or collateralized obligations.
Passthrough certificates are assetbacked securities which
represent an undivided fractional ownership interest in an
underlying pool of assets. Passthrough certificates usually
provide for payments of principal and interest received to be
passed through to their holders, usually after deduction for
certain costs and expenses incurred in administering the pool.
Because passthrough certificates represent an ownership
interest in the underlying assets, the holders thereof bear
directly the risk of any defaults by the obligors on the
underlying assets not covered by any credit support. See
"Types of Credit Support".
Assetbacked securities issued in the form of debt instruments,
also known as collateralized obligations, are generally issued
as the debt of a special purpose entity organized solely for
the purpose of owning such assets and issuing such debt. Such
assets are most often trade, credit card or automobile
receivables. The assets collateralizing such assetbacked
securities are pledged to a trustee or custodian for the
benefit of the holders thereof. Such issuers generally hold
no assets other than those underlying the assetbacked
securities and any credit support provided. As a result,
although payments on such assetbacked securities are
obligations of the issuers, in the event of defaults on the
underlying assets not covered by any credit support (see
"Types of Credit Support"), the issuing entities are unlikely
to have sufficient assets to satisfy their obligations on the
related assetbacked securities.
Methods of Allocating Cash Flows. While many assetbacked
securities are issued with only one class of security, many
assetbacked securities are issued in more than one class, each
with different payment terms. Multiple class assetbacked
securities are issued for two main reasons. First, multiple
classes may be used as a method of providing credit support.
This is accomplished typically through creation of one or more
classes whose right to payments on the assetbacked security is
made subordinate to the right to such payments of the
remaining class or classes. See "Types of Credit Support."
Second, multiple classes may permit the issuance of securities
with payment terms, interest rates or other characteristics
differing both from those of each other and from those of the
underlying assets. Examples include socalled "strips"
(assetbacked securities entitling the holder to
disproportionate interests with respect to the allocation of
interest and principal of the assets backing the security),
and securities with class or classes having characteristics
which mimic the characteristics of nonassetbacked securities,
such as floating interest rates (i.e., interest rates which
adjust as a specified benchmark changes) or scheduled
amortization of principal.
Assetbacked securities in which the payment streams on the
underlying assets are allocated in a manner different than
those described above may be issued in the future. The Fund
may invest in such assetbacked securities if such investment
is otherwise consistent with its investment objectives and
policies and with the investment restrictions of the Fund.
Types of Credit Support. Assetbacked securities are often
backed by a pool of assets representing the obligations of a
number of different parties. To lessen the effect of failures
by obligors on underlying assets to make payments, such
securities may contain elements of credit support. Such
credit support falls into two classes: liquidity protection
and protection against ultimate default by an obligor on the
underlying assets. Liquidity protection refers to the
provision of advances, generally by the entity administering
the pool of assets, to ensure that scheduled payments on the
underlying pool are made in a timely fashion. Protection
against ultimate default ensures ultimate payment of the
obligations on at least a portion of the assets in the pool.
Such protection may be provided through guarantees, insurance
policies or letters of credit obtained from third parties,
through various means of structuring the transaction or
through a combination of such approaches. Examples of
assetbacked securities with credit support arising out of the
structure of the transaction include "seniorsubordinated
securities" (multiple class assetbacked securities with
certain classes subordinate to other classes as to the payment
of principal thereon, with the result that defaults on the
underlying assets are borne first by the holders of the
subordinated class) and assetbacked securities that have
"reserve funds" (where cash or investments, sometimes funded
from a portion of the initial payments on the underlying
assets, are held in reserve against future losses) or that
have been "over collateralized" (where the scheduled payments
on, or the principal amount of, the underlying assets
substantially exceeds that required to make payment of the
assetbacked securities and pay any servicing or other fees).
The degree of credit support provided on each issue is based
generally on historical information respecting the level of
credit risk associated with such payments. Delinquency or
loss in excess of that anticipated could adversely affect the
return on an investment in an assetbacked security.
Automobile Receivable Securities. Each Fund may invest in
Asset Backed Securities which are backed by receivables from
motor vehicle installment sales contracts or installment loans
secured by motor vehicles ("Automobile Receivable
Securities"). Since installment sales contracts for motor
vehicles or installment loans related thereto ("Automobile
Contracts") typically have shorter durations and lower
incidences of prepayment, Automobile Receivable Securities
generally will exhibit a shorter average life and are less
susceptible to prepayment risk.
Most entities that issue Automobile Receivable Securities
create an enforceable interest in their respective Automobile
Contracts only by filing a financing statement and by having
the servicer of the Automobile Contracts, which is usually the
originator of the Automobile Contracts, take custody thereof.
In such circumstances, if the servicer of the Automobile
Contracts were to sell the same Automobile Contracts to
another party, in violation of its obligation not to do so,
there is a risk that such party could acquire an interest in
the Automobile Contracts superior to that of the holders of
Automobile Receivable Securities. Also although most
Automobile Contracts grant a security interest in the motor
vehicle being financed, in most states the security interest
in a motor vehicle must be noted on the certificate of title
to create an enforceable security interest against competing
claims of other parties. Due to the large number of vehicles
involved, however, the certificate of title to each vehicle
financed, pursuant to the Automobile Contracts underlying the
Automobile Receivable Security, usually is not amended to
reflect the assignment of the seller's security interest for
the benefit of the holders of the Automobile Receivable
Securities. Therefore, there is the possibility that
recoveries on repossessed collateral may not, in some cases,
be available to support payments on the securities. In
addition, various state and federal securities laws give the
motor vehicle owner the right to assert against the holder of
the owner's Automobile Contract certain defenses such owner
would have against the seller of the motor vehicle. The
assertion of such defenses could reduce payments on the
Automobile Receivable Securities.
Credit Card Receivable Securities. The Fund may invest in
Asset Backed Securities backed by receivables from revolving
credit card agreements ("Credit Card Receivable Securities").
Credit balances on revolving credit card agreements
("Accounts") are generally paid down more rapidly than are
Automobile Contracts. Most of the Credit Card Receivable
Securities issued publicly to date have been PassThrough
Certificates. In order to lengthen the maturity of Credit
Card Receivable Securities, most such securities provide for
a fixed period during which only interest payments on the
underlying Accounts are passed through to the security holder
and principal payments received on such Accounts are used to
fund the transfer to the pool of assets supporting the related
Credit Card Receivable Securities of additional credit card
charges made on an Account. The initial fixed period usually
may be shortened upon the occurrence of specified events which
signal a potential deterioration in the quality of the assets
backing the security, such as the imposition of a cap on
interest rates. The ability of the issuer to extend the life
of an issue of Credit Card Receivable Securities thus depends
upon the continued generation of additional principal amounts
in the underlying accounts during the initial period and the
nonoccurrence of specified events. An acceleration in
cardholders' payment rates or any other event which shortens
the period during which additional credit card charges on an
Account may be transferred to the pool of assets supporting
the related Credit Card Receivable Security could shorten the
weighted average life and yield of the Credit Card Receivable
Security.
Credit cardholders are entitled to the protection of a number
of state and federal consumer credit laws, many of which give
such holder the right to set off certain amounts against
balances owed on the credit card, thereby reducing amounts
paid on Accounts. In addition, unlike most other Asset Backed
Securities, Accounts are unsecured obligations of the
cardholder.
Other Assets. T. Rowe Price anticipates that AssetBacked
Securities backed by assets other than those described above
will be issued in the future. The Fund may invest in such
securities in the future if such investment is otherwise
consistent with its investment objective and policies.
There are, of course, other types of securities that are, or
may become available, which are similar to the foregoing and
the Fund reserves the right to invest in these securities.
Zero Coupon and PayinKind Bonds (Personal Strategy Balanced
Fund)
A zero coupon security has no cash coupon payments. Instead,
the issuer sells the security at a substantial discount from
its maturity value. The interest received by the investor
from holding this security to maturity is the difference
between the maturity value and the purchase price. The
advantage to the investor is that reinvestment risk of the
income received during the life of the bond is eliminated.
However, zerocoupon bonds like other bonds retain interest
rate and credit risk and usually display more price volatility
than those securities that pay a cash coupon.
PayinKind (PIK) Instruments are securities that pay interest
in either cash or additional securities, at the issuer's
option, for a specified period. PIK's, like zero coupon
bonds, are designed to give an issuer flexibility in managing
cash flow. PIK bonds can be either senior or subordinated
debt and trade flat (i.e., without accrued interest). The
price of PIK bonds is expected to reflect the market value of
the underlying debt plus an amount representing accrued
interest since the last payment. PIK's are usually less
volatile than zero coupon bonds, but more volatile than cash
pay securities.
For federal income tax purposes, these types of bonds will
require the recognition of gross income each year even though
no cash may be paid to the Fund until the maturity or call
date of the bond. The Fund will nonetheless be required to
distribute substantially all of this gross income each year to
comply with the Internal Revenue Code, and such distributions
could reduce the amount of cash available for investment by
the Fund.
Hybrid Instruments (All Funds Except Prime Reserve)
Hybrid Instruments have been developed and combine the
elements of futures contracts or options with those of debt,
preferred equity or a depository instrument (hereinafter
"Hybrid Instruments"). Generally, a Hybrid Instrument will be
a debt security, preferred stock, depository share, trust
certificate, certificate of deposit or other evidence of
indebtedness on which a portion of or all interest payments,
and/or the principal or stated amount payable at maturity,
redemption or retirement, is determined by reference to
prices, changes in prices, or differences between prices, of
securities, currencies, intangibles, goods, articles or
commodities (collectively "Underlying Assets") or by another
objective index, economic factor or other measure, such as
interest rates, currency exchange rates, commodity indices,
and securities indices (collectively "Benchmarks"). Thus,
Hybrid Instruments may take a variety of forms, including, but
not limited to, debt instruments with interest or principal
payments or redemption terms determined by reference to the
value of a currency or commodity or securities index at a
future point in time, preferred stock with dividend rates
determined by reference to the value of a currency, or
convertible securities with the conversion terms related to a
particular commodity.
Hybrid Instruments can be an efficient means of creating
exposure to a particular market, or segment of a market, with
the objective of enhancing total return. For example, the
Fund may wish to take advantage of expected declines in
interest rates in several European countries, but avoid the
transactions costs associated with buying and currencyhedging
the foreign bond positions. One solution would be to purchase
a U.S. dollardenominated Hybrid Instrument whose redemption
price is linked to the average three year interest rate in a
designated group of countries. The redemption price formula
would provide for payoffs of greater than par if the average
interest rate was lower than a specified level, and payoffs of
less than par if rates were above the specified level.
Furthermore, the Fund could limit the downside risk of the
security by establishing a minimum redemption price so that
the principal paid at maturity could not be below a
predetermined minimum level if interest rates were to rise
significantly. The purpose of this arrangement, known as a
structured security with an embedded put option, would be to
give the Fund the desired European bond exposure while
avoiding currency risk, limiting downside market risk, and
lowering transactions costs. Of course, there is no guarantee
that the strategy will be successful and the Fund could lose
money if, for example, interest rates do not move as
anticipated or credit problems develop with the issuer of the
Hybrid.
The risks of investing in Hybrid Instruments reflect a
combination of the risks of investing in securities, options,
futures and currencies. Thus, an investment in a Hybrid
Instrument may entail significant risks that are not
associated with a similar investment in a traditional debt
instrument that has a fixed principal amount, is denominated
in U.S. dollars or bears interest either at a fixed rate or a
floating rate determined by reference to a common, nationally
published Benchmark. The risks of a particular Hybrid
Instrument will, of course, depend upon the terms of the
instrument, but may include, without limitation, the
possibility of significant changes in the Benchmarks or the
prices of Underlying Assets to which the instrument is linked.
Such risks generally depend upon factors which are unrelated
to the operations or credit quality of the issuer of the
Hybrid Instrument and which may not be readily foreseen by the
purchaser, such as economic and political events, the supply
and demand for the Underlying Assets and interest rate
movements. In recent years, various Benchmarks and prices for
Underlying Assets have been highly volatile, and such
volatility may be expected in the future. Reference is also
made to the discussion of futures, options, and forward
contracts herein for a discussion of the risks associated with
such investments.
Hybrid Instruments are potentially more volatile and carry
greater market risks than traditional debt instruments.
Depending on the structure of the particular Hybrid
Instrument, changes in a Benchmark may be magnified by the
terms of the Hybrid Instrument and have an even more dramatic
and substantial effect upon the value of the Hybrid
Instrument. Also, the prices of the Hybrid Instrument and the
Benchmark or Underlying Asset may not move in the same
direction or at the same time.
Hybrid Instruments may bear interest or pay preferred
dividends at below market (or even relatively nominal) rates.
Alternatively, Hybrid Instruments may bear interest at above
market rates but bear an increased risk of principal loss (or
gain). The latter scenario may result if "leverage" is used
to structure the Hybrid Instrument. Leverage risk occurs when
the Hybrid Instrument is structured so that a given change in
a Benchmark or Underlying Asset is multiplied to produce a
greater value change in the Hybrid Instrument, thereby
magnifying the risk of loss as well as the potential for gain.
Hybrid Instruments may also carry liquidity risk since the
instruments are often "customized" to meet the portfolio needs
of a particular investor, and therefore, the number of
investors that are willing and able to buy such instruments in
the secondary market may be smaller than that for more
traditional debt securities. In addition, because the
purchase and sale of Hybrid Instruments could take place in an
overthecounter market without the guarantee of a central
clearing organization or in a transaction between the Fund and
the issuer of the Hybrid Instrument, the creditworthiness of
the counter party or issuer of the Hybrid Instrument would be
an additional risk factor which the Fund would have to
consider and monitor. Hybrid Instruments also may not be
subject to regulation of the Commodities Futures Trading
Commission ("CFTC"), which generally regulates the trading of
commodity futures by U.S. persons, the SEC, which regulates
the offer and sale of securities by and to U.S. persons, or
any other governmental regulatory authority.
The various risks discussed above, particularly the market
risk of such instruments, may in turn cause significant
fluctuations in the net asset value of the Fund. Accordingly,
each Fund will limit its investments in Hybrid Instruments to
10% of net assets. However, because of their volatility, it
is possible that the Fund's investment in Hybrid Instruments
will account for more than 10% of the Fund's return (positive
or negative).
WhenIssued Securities and Forward Commitment Contracts
(LimitedTerm Bond, Prime Reserve, and Personal Strategy
Balanced Funds)
Each Fund may purchase securities on a "whenissued" or delayed
delivery basis ("WhenIssueds") and may purchase securities on
a forward commitment basis ("Forwards"). Any or all of the
Fund's investments in debt securities may be in the form of
WhenIssueds and Forwards. The price of such securities, which
may be expressed in yield terms, is fixed at the time the
commitment to purchase is made, but delivery and payment take
place at a later date. Normally, the settlement date occurs
within 90 days of the purchase for WhenIssueds, but may be
substantially longer for Forwards. During the period between
purchase and settlement, no payment is made by the Fund to the
issuer and no interest accrues to the Fund. The purchase of
these securities will result in a loss if their value declines
prior to the settlement date. This could occur, for example,
if interest rates increase prior to settlement. The longer
the period between purchase and settlement, the greater the
risks are. At the time the Fund makes the commitment to
purchase these securities, it will record the transaction and
reflect the value of the security in determining its net asset
value. The Fund will cover these securities by maintaining
cash and/or liquid, highgrade debt securities with its
custodian bank equal in value to commitments for them during
the time between the purchase and the settlement. Therefore,
the longer this period, the longer the period during which
alternative investment options are not available to the Fund
(to the extent of the securities used for cover). Such
securities either will mature or, if necessary, be sold on or
before the settlement date.
To the extent the Fund remains fully or almost fully invested
(in securities with a remaining maturity of more than one
year) at the same time it purchases these securities, there
will be greater fluctuations in the Fund's net asset value
than if the Fund did not purchase them.
Additional Adjustable Rate Securities (LimitedTerm Bond, Prime
Reserve, and Personal Strategy Balanced Funds)
Certain securities may be issued with adjustable interest
rates that are reset periodically by predetermined formulas or
indexes in order to minimize movements in the principal value
of the investment. Such securities may have longterm
maturities, but may be treated as a shortterm investment under
certain conditions. Generally, as interest rates decrease or
increase, the potential for capital appreciation or
depreciation on these securities is less than for fixedrate
obligations. These securities may take the following forms:
o Variable Rate Securities. Variable rate instruments are
those whose terms provide for the adjustment of their
interest rates on set dates and which, upon such
adjustment, can reasonably be expected to have a market
value that approximates its par value. A variable rate
instrument, the principal amount of which is scheduled to
be paid in 397 days or less, is deemed to have a maturity
equal to the period remaining until the next readjustment
of the interest rate. A variable rate instrument which
is subject to a demand feature entitles the purchaser to
receive the principal amount of the underlying security
or securities, either (i) upon notice of no more than 30
days or (ii) at specified intervals not exceeding 397
days and upon no more than 30 days' notice, is deemed to
have a maturity equal to the longer of the period
remaining until the next readjustment of the interest
rate or the period remaining until the principal amount
can be recovered through demand.
o Floating Rate Securities. Floating rate instruments are
those whose terms provide for the adjustment of their
interest rates whenever a specified interest rate changes
and which, at any time, can reasonably be expected to
have a market value that approximates its par value. The
maturity of a floating rate instrument is deemed to be
the period remaining until the date (noted on the face of
the instrument) on which the principal amount must be
paid, or in the case of an instrument called for
redemption, the date on which the redemption payment must
be made. Floating rate instruments with demand features
are deemed to have a maturity equal to the period
remaining until the principal amount can be recovered
through demand.
o Put Option Bonds. Longterm obligations with maturities
longer than one year may provide purchasers an optional
or mandatory tender of the security at par value at
predetermined intervals, often ranging from one month to
several years (e.g., a 30year bond with a fiveyear tender
period). These instruments are deemed to have a maturity
equal to the period remaining to the put date.
Illiquid or Restricted Securities (All Funds)
Restricted securities may be sold only in privately negotiated
transactions or in a public offering with respect to which a
registration statement is in effect under the Securities Act
of 1933 (the "1933 Act"). Where registration is required, the
Fund may be obligated to pay all or part of the registration
expenses and a considerable period may elapse between the time
of the decision to sell and the time the Fund may be permitted
to sell a security under an effective registration statement.
If, during such a period, adverse market conditions were to
develop, the Fund might obtain a less favorable price than
prevailed when it decided to sell. Restricted securities will
be priced at fair value as determined in accordance with
procedures prescribed by the Fund's Board of Directors. If
through the appreciation of illiquid securities or the
depreciation of liquid securities, the Fund should be in a
position where more than 15% of the value of its net assets is
invested in illiquid assets, including restricted securities,
the Fund will take appropriate steps to protect liquidity.
Notwithstanding the above, each Fund may purchase securities
which, while privately placed, are eligible for purchase and
sale under Rule 144A under the 1933 Act. This rule permits
certain qualified institutional buyers, such as the Fund, to
trade in privately placed securities even though such
securities are not registered under the 1933 Act. The Manager
under the supervision of the Fund's Board of
Directors/Trustees, will consider whether securities purchased
under Rule 144A are illiquid and thus subject to the Fund's
restriction of investing no more than 15% of its net assets in
illiquid securities. A determination of whether a Rule 144A
security is liquid or not is a question of fact. In making
this determination, the Manager will consider the trading
markets for the specific security taking into account the
unregistered nature of a Rule 144A security. In addition, the
Manager could consider the (1) frequency of trades and quotes,
(2) number of dealers and potential purchases, (3) dealer
undertakings to make a market, and (4) the nature of the
security and of marketplace trades (e.g., the time needed to
dispose of the security, the method of soliciting offers and
the mechanics of transfer). The liquidity of Rule 144A
securities would be monitored, and if as a result of changed
conditions it is determined that a Rule 144A security is no
longer liquid, the Fund's holdings of illiquid securities
would be reviewed to determine what, if any, steps are
required to assure that the Fund does not invest more than 15%
of its net assets in illiquid securities. Investing in Rule
144A securities could have the effect of increasing the amount
of the Fund's assets invested in illiquid securities if
qualified institutional buyers are unwilling to purchase such
securities.
Warrants (All Funds Except Prime Reserve)
Each Fund may acquire warrants. Warrants are pure speculation
in that they have no voting rights, pay no dividends and have
no rights with respect to the assets of the corporation
issuing them. Warrants basically are options to purchase
equity securities at a specific price valid for a specific
period of time. They do not represent ownership of the
securities, but only the right to buy them. Warrants differ
from call options in that warrants are issued by the issuer of
the security which may be purchased on their exercise, whereas
call options may be written or issued by anyone. The prices
of warrants do not necessarily move parallel to the prices of
the underlying securities.
There are, of course, other types of securities that are, or
may become available, which are similar to the foregoing and
each Fund may invest in these securities.
Portfolio Management
Practices (All Funds)
Lending of Portfolio Securities
Securities loans are made to brokerdealers or institutional
investors or other persons, pursuant to agreements requiring
that the loans be continuously secured by collateral at least
equal at all times to the value of the securities lent marked
to market on a daily basis. The collateral received will
consist of cash, U.S. government securities, letters of credit
or such other collateral as may be permitted under its
investment program. While the securities are being lent, the
Fund will continue to receive the equivalent of the interest
or dividends paid by the issuer on the securities, as well as
interest on the investment of the collateral or a fee from the
borrower. The Fund has a right to call each loan and obtain
the securities on five business days' notice or, in connection
with securities trading on foreign markets, within such longer
period of time which coincides with the normal settlement
period for purchases and sales of such securities in such
foreign markets. The Fund will not have the right to vote
securities while they are being lent, but it will call a loan
in anticipation of any important vote. The risks in lending
portfolio securities, as with other extensions of secured
credit, consist of possible delay in receiving additional
collateral or in the recovery of the securities or possible
loss of rights in the collateral should the borrower fail
financially. Loans will only be made to firms deemed by the
Manager to be of good standing and will not be made unless, in
the judgment of the Manager, the consideration to be earned
from such loans would justify the risk.
Other Lending/Borrowing
Subject to approval by the Securities and Exchange Commission
and certain state regulatory agencies, the Fund may make loans
to, or borrow funds from, other mutual funds sponsored or
advised by T. Rowe Price or PriceFleming (collectively, "Price
Funds"). None of the Funds have current intentions of
engaging in these practices at this time.
Repurchase Agreements
Each Fund may enter into a repurchase agreement through which
an investor (such as the Fund) purchases a security (known as
the "underlying security") from a wellestablished securities
dealer or a bank that is a member of the Federal Reserve
System. Any such dealer or bank will be on the Manager's
approved list.
At that time, the bank or securities dealer agrees to
repurchase the underlying security at the same price, plus
specified interest. Repurchase agreements are generally for
a short period of time, often less than a week. Repurchase
agreements which do not provide for payment within seven days
will be treated as illiquid securities. The Fund will only
enter into repurchase agreements where (i) the underlying
securities are of the type (excluding maturity limitations)
which the Fund's investment guidelines would allow it to
purchase directly, (ii) the market value of the underlying
security, including interest accrued, will be at all times
equal to or exceed the value of the repurchase agreement, and
(iii) payment for the underlying security is made only upon
physical delivery or evidence of bookentry transfer to the
account of the custodian or a bank acting as agent. In the
event of a bankruptcy or other default of a seller of a
repurchase agreement, the Fund could experience both delays in
liquidating the underlying security and losses, including: (a)
possible decline in the value of the underlying security
during the period while the Fund seeks to enforce its rights
thereto; (b) possible subnormal levels of income and lack of
access to income during this period; and (c) expenses of
enforcing its rights.
Reverse Repurchase Agreements (LimitedTerm Bond, Prime
Reserve, and Personal Strategy Balanced Funds)
Although none of the Funds have current intentions, in the
foreseeable future, of engaging in reverse repurchase
agreements, each Fund reserves the right to do so. Reverse
repurchase agreements are ordinary repurchase agreements in
which the Fund is the seller of, rather than the investor in,
securities, and agrees to repurchase them at an agreed upon
time and price. Use of a reverse repurchase agreement may be
preferable to a regular sale and later repurchase of the
securities because it avoids certain market risks and
transaction costs. A reverse repurchase agreement may be
viewed as a type of borrowing by the Fund, subject to
Investment Restriction (1). (See "Investment Restrictions,"
page 44.)
Options (All Funds Except Prime Reserve)
Options are a type of potentially highrisk derivative.
o Writing Covered Call Options. Each Fund may write (sell)
American or European style "covered" call options and
purchase options to close out options previously written
by the Fund. In writing covered call options, the Fund
expects to generate additional premium income which
should serve to enhance the Fund's total return and
reduce the effect of any price decline of the security or
currency involved in the option. Covered call options
will generally be written on securities or currencies
which, in the Manager's opinion, are not expected to have
any major price increases or moves in the near future but
which, over the long term, are deemed to be attractive
investments for the Fund.
A call option gives the holder (buyer) the "right to
purchase" a security or currency at a specified price
(the exercise price) at expiration of the option
(European style) or at any time until a certain date (the
expiration date) (American style). So long as the
obligation of the writer of a call option continues, he
may be assigned an exercise notice by the brokerdealer
through whom such option was sold, requiring him to
deliver the underlying security or currency against
payment of the exercise price. This obligation
terminates upon the expiration of the call option, or
such earlier time at which the writer effects a closing
purchase transaction by repurchasing an option identical
to that previously sold. To secure his obligation to
deliver the underlying security or currency in the case
of a call option, a writer is required to deposit in
escrow the underlying security or currency or other
assets in accordance with the rules of a clearing
corporation.
Each Fund will write only covered call options. This
means that the Fund will own the security or currency
subject to the option or an option to purchase the same
underlying security or currency, having an exercise price
equal to or less than the exercise price of the "covered"
option, or will establish and maintain with its custodian
for the term of the option, an account consisting of
cash, U.S. government securities or other liquid
highgrade debt obligations having a value equal to the
fluctuating market value of the optioned securities or
currencies.
Portfolio securities or currencies on which call options
may be written will be purchased solely on the basis of
investment considerations consistent with each Fund's
investment objective. The writing of covered call
options is a conservative investment technique believed
to involve relatively little risk (in contrast to the
writing of naked or uncovered options, which the Fund
will not do), but capable of enhancing the Fund's total
return. When writing a covered call option, the Fund, in
return for the premium, gives up the opportunity for
profit from a price increase in the underlying security
or currency above the exercise price, but conversely
retains the risk of loss should the price of the security
or currency decline. Unlike one who owns securities or
currencies not subject to an option, the Fund has no
control over when it may be required to sell the
underlying securities or currencies, since it may be
assigned an exercise notice at any time prior to the
expiration of its obligation as a writer. If a call
option which the Fund has written expires, the Fund will
realize a gain in the amount of the premium; however,
such gain may be offset by a decline in the market value
of the underlying security or currency during the option
period. If the call option is exercised, the Fund will
realize a gain or loss from the sale of the underlying
security or currency. The Fund does not consider a
security or currency covered by a call to be "pledged" as
that term is used in the Fund's policy which limits the
pledging or mortgaging of its assets.
The premium received is the market value of an option.
The premium the Fund will receive from writing a call
option will reflect, among other things, the current
market price of the underlying security or currency, the
relationship of the exercise price to such market price,
the historical price volatility of the underlying
security or currency, and the length of the option
period. Once the decision to write a call option has
been made, the Manager, in determining whether a
particular call option should be written on a particular
security or currency, will consider the reasonableness of
the anticipated premium and the likelihood that a liquid
secondary market will exist for those options. The
premium received by the Fund for writing covered call
options will be recorded as a liability of that Fund.
This liability will be adjusted daily to the option's
current market value, which will be the latest sale price
at the time at which the net asset value per share of
each Fund is computed (close of the New York Stock
Exchange), or, in the absence of such sale, the latest
asked price. The option will be terminated upon
expiration of the option, the purchase of an identical
option in a closing transaction, or delivery of the
underlying security or currency upon the exercise of the
option.
Closing transactions will be effected in order to realize
a profit on an outstanding call option, to prevent an
underlying security or currency from being called, or, to
permit the sale of the underlying security or currency.
Furthermore, effecting a closing transaction will permit
the Fund to write another call option on the underlying
security or currency with either a different exercise
price or expiration date or both. If the Fund desires to
sell a particular security or currency from its portfolio
on which it has written a call option, or purchased a put
option, it will seek to effect a closing transaction
prior to, or concurrently with, the sale of the security
or currency. There is, of course, no assurance that any
Fund will be able to effect such closing transactions at
favorable prices. If the Fund cannot enter into such a
transaction, it may be required to hold a security or
currency that it might otherwise have sold. When the
Fund writes a covered call option, it runs the risk of
not being able to participate in the appreciation of the
underlying securities or currencies above the exercise
price, as well as the risk of being required to hold on
to securities or currencies that are depreciating in
value. This could result in higher transaction costs.
Each Fund will pay transaction costs in connection with
the writing of options to close out previously written
options. Such transaction costs are normally higher than
those applicable to purchases and sales of portfolio
securities.
Call options written by the Fund will normally have
expiration dates of less than nine months from the date
written. The exercise price of the options may be below,
equal to, or above the current market values of the
underlying securities or currencies at the time the
options are written. From time to time, the Fund may
purchase an underlying security or currency for delivery
in accordance with an exercise notice of a call option
assigned to it, rather than delivering such security or
currency from its portfolio. In such cases, additional
costs may be incurred.
The Fund will realize a profit or loss from a closing
purchase transaction if the cost of the transaction is
less or more than the premium received from the writing
of the option. Because increases in the market price of
a call option will generally reflect increases in the
market price of the underlying security or currency, any
loss resulting from the repurchase of a call option is
likely to be offset in whole or in part by appreciation
of the underlying security or currency owned by the Fund.
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.
In calculating the 25% limit, the Fund will offset,
against the value of assets covering written calls and
puts, the value of purchased calls and puts on identical
securities or currencies with identical maturity dates.
o Writing Covered Put Options. Each Fund may write American
or European style covered put options and purchase
options to close out options previously written by the
Fund. A put option gives the purchaser of the option the
right to sell, and the writer (seller) has the obligation
to buy, the underlying security or currency at the
exercise price during the option period (American style)
or at the expiration of the option (European style). So
long as the obligation of the writer continues, he may be
assigned an exercise notice by the brokerdealer 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
highgrade debt obligations in an amount not less than the
exercise price or the Fund will own an option to sell the
underlying security or currency subject to the option
having an exercise price equal to or greater than the
exercise price of the "covered" option at all times while
the put option is outstanding. (The rules of a clearing
corporation currently require that such assets be
deposited in escrow to secure payment of the exercise
price.)
The Fund would generally write covered put options in
circumstances where the Manager wishes to purchase the
underlying security or currency for the Fund's portfolio
at a price lower than the current market price of the
security or currency. In such event the Fund would write
a put option at an exercise price which, reduced by the
premium received on the option, reflects the lower price
it is willing to pay. Since the Fund would also receive
interest on debt securities or currencies maintained to
cover the exercise price of the option, this technique
could be used to enhance current return during periods of
market uncertainty. The risk in such a transaction would
be that the market price of the underlying security or
currency would decline below the exercise price less the
premiums received. Such a decline could be substantial
and result in a significant loss to the Fund. In
addition, the Fund, because it does not own the specific
securities or currencies which it may be required to
purchase in exercise of the put, cannot benefit from
appreciation, if any, with respect to such specific
securities or currencies.
The Fund will not write a covered put option if, as a
result, the aggregate market value of all portfolio
securities or currencies covering put or call options
exceeds 25% of the market value of the Fund's net assets.
In calculating the 25% limit, the Fund will offset,
against the value of assets covering written puts and
calls, the value of purchased puts and calls on identical
securities or currencies with identical maturity dates.
o Purchasing Put Options. Each Fund may purchase American
or European style put options. As the holder of a put
option, the Fund has the right to sell the underlying
security or currency at the exercise price at any time
during the option period (American style) or at the
expiration of the option (European style). The Fund may
enter into closing sale transactions with respect to such
options, exercise them or permit them to expire. The
Fund may purchase put options for defensive purposes in
order to protect against an anticipated decline in the
value of its securities or currencies. An example of
such use of put options is provided below.
Each Fund may purchase a put option on an underlying
security or currency (a "protective put") owned by the
Fund as a defensive technique in order to protect against
an anticipated decline in the value of the security or
currency. Such hedge protection is provided only during
the life of the put option when the Fund, as the holder
of the put option, is able to sell the underlying
security or currency at the put exercise price regardless
of any decline in the underlying security's market price
or currency's exchange value. For example, a put option
may be purchased in order to protect unrealized
appreciation of a security or currency where the Manager
deems it desirable to continue to hold the security or
currency because of tax considerations. The premium paid
for the put option and any transaction costs would reduce
any capital gain otherwise available for distribution
when the security or currency is eventually sold.
The Fund may also purchase put options at a time when the
Fund does not own the underlying security or currency.
By purchasing put options on a security or currency it
does not own, the Fund seeks to benefit from a decline in
the market price of the underlying security or currency.
If the put option is not sold when it has remaining
value, and if the market price of the underlying security
or currency remains equal to or greater than the exercise
price during the life of the put option, the Fund will
lose its entire investment in the put option. In order
for the purchase of a put option to be profitable, the
market price of the underlying security or currency must
decline sufficiently below the exercise price to cover
the premium and transaction costs, unless the put option
is sold in a closing sale transaction.
The Fund will not commit more than 5% of its assets to
premiums when purchasing put and call options. The
premium paid by the Fund when purchasing a put option
will be recorded as an asset of the Fund. This asset
will be adjusted daily to the option's current market
value, which will be the latest sale price at the time at
which the net asset value per share of the Fund is
computed (close of New York Stock Exchange), or, in the
absence of such sale, the latest bid price. This asset
will be terminated upon expiration of the option, the
selling (writing) of an identical option in a closing
transaction, or the delivery of the underlying security
or currency upon the exercise of the option.
o Purchasing Call Options. Each Fund may purchase American
or European style call options. As the holder of a call
option, the Fund has the right to purchase the underlying
security or currency at the exercise price at any time
during the option period (American style) or at the
expiration of the option (European style). The Fund may
enter into closing sale transactions with respect to such
options, exercise them or permit them to expire. The
Fund may purchase call options for the purpose of
increasing its current return or avoiding tax
consequences which could reduce its current return. The
Fund may also purchase call options in order to acquire
the underlying securities or currencies. Examples of
such uses of call options are provided below.
Call options may be purchased by the Fund for the purpose
of acquiring the underlying securities or currencies for
its portfolio. Utilized in this fashion, the purchase of
call options enables the Fund to acquire the securities
or currencies at the exercise price of the call option
plus the premium paid. At times the net cost of
acquiring securities or currencies in this manner may be
less than the cost of acquiring the securities or
currencies directly. This technique may also be useful
to the Fund in purchasing a large block of securities or
currencies that would be more difficult to acquire by
direct market purchases. So long as it holds such a call
option rather than the underlying security or currency
itself, the Fund is partially protected from any
unexpected decline in the market price of the underlying
security or currency and in such event could allow the
call option to expire, incurring a loss only to the
extent of the premium paid for the option.
The Fund may not be permitted to commit more than 5% of
its assets to premiums when purchasing call and put
options. The Fund may also purchase call options on
underlying securities or currencies it owns in order to
protect unrealized gains on call options previously
written by it. A call option would be purchased for this
purpose where tax considerations make it inadvisable to
realize such gains through a closing purchase
transaction. Call options may also be purchased at times
to avoid realizing losses.
o Dealer (OvertheCounter) Options. Each Fund may engage in
transactions involving dealer options. Certain risks are
specific to dealer options. While the Fund would look to
a clearing corporation to exercise exchangetraded
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.
Exchangetraded options generally have a continuous liquid
market while dealer options have none. Consequently, the
Fund will generally be able to realize the value of a
dealer option it has purchased only by exercising it or
reselling it to the dealer who issued it. Similarly,
when the Fund writes a dealer option, it generally will
be able to close out the option prior to its expiration
only by entering into a closing purchase transaction with
the dealer to which the Fund originally wrote the option.
While the Fund will seek to enter into dealer options
only with dealers who will agree to and which are
expected to be capable of entering into closing
transactions with that Fund, there can be no assurance
that the Fund will be able to liquidate a dealer option
at a favorable price at any time prior to expiration.
Until the Fund, as a covered dealer call option writer,
is able to effect a closing purchase transaction, it will
not be able to liquidate securities (or other assets) or
currencies used as cover until the option expires or is
exercised. In the event of insolvency of the contra
party, the Fund may be unable to liquidate a dealer
option. With respect to options written by the Fund, the
inability to enter into a closing transaction may result
in material losses to that Fund. For example, since the
Fund must maintain a secured position with respect to any
call option on a security it writes, the Fund may not
sell the assets which it has segregated to secure the
position while it is obligated under the option. This
requirement may impair the Fund's ability to sell
portfolio securities or currencies at a time when such
sale might be advantageous.
The Staff of the SEC has taken the position that
purchased dealer options and the assets used to secure
the written dealer options are illiquid securities. The
Fund may treat the cover used for written OTC options as
liquid if the dealer agrees that the Fund may repurchase
the OTC option it has written for a maximum price to be
calculated by a predetermined formula. In such cases,
the OTC option would be considered illiquid only to the
extent the maximum repurchase price under the formula
exceeds the intrinsic value of the option. Accordingly,
the Fund will treat dealer options as subject to the
Fund's limitation on illiquid securities. If the SEC
changes its position on the liquidity of dealer options,
the Fund will change its treatment of such instrument
accordingly.
Interest Rate Transactions (LimitedTerm Bond Portfolio)
This Fund may enter into various interest rate transactions
such as interest rate swaps and the purchase or sale of
interest rate caps and floors, to preserve a return or spread
on a particular investment or portion of its portfolio, to
create synthetic securities, or to structure transactions
designed for other nonspeculative purposes.
Interest rate swaps involve the exchange by the Fund with
third parties of its respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for
fixed rate payments. The purchase of an interest rate cap
entitles the purchaser, to the extent that a specified index
exceeds a predetermined interest rate, to receive payments of
interest on a contractuallybased principal amount from the
party selling the interest rate cap. The purchase of an
interest rate floor entitles the purchaser, to the extent that
a specified index falls below a predetermined interest rate,
to receive payments of interest on a contractuallybased
principal amount from the party selling the interest rate
floor. In circumstances in which the Manager anticipates that
interest rates will decline, the Fund might, for example,
enter into an interest rate swap as the floating rate payor.
In the case where the Fund purchases such an interest rate
swap, if the floating rate payments fell below the level of
the fixed rate payment set in the swap agreement, the Fund's
counterparties would pay the Fund's amounts equal to interest
computed at the difference between the fixed and floating
rates over the national principal amount. Such payments would
offset or partially offset the decrease in the payments the
Fund would receive in respect of floating rate assets being
hedged. In the case of purchasing an interest rate floor, if
interest rates declined below the floor rate, the Fund would
receive payments from the counterparties which would wholly or
partially offset the decrease in the payments they would
receive in respect of the financial instruments being hedged.
The Fund will usually enter into interest rate swaps on a net
basis, i.e., the two payment streams are netted out, with the
Fund receiving or paying, as the case may be, only the net
amount of the two payments. The net amount of the excess, if
any, of the Fund's obligations over its entitlements with
respect to each interest rate swap will be accrued on a daily
basis and an amount of cash or highquality liquid securities
having an aggregate net asset value at least equal to the
accrued excess will be maintained in an account by the Fund's
custodian. If the Fund enters into an interest rate swap on
other than a net basis, the Fund would maintain an account in
the full amount accrued on a daily basis of the Fund's
obligations with respect to the swap. To the extent the Fund
sells (i.e., writes) caps and floors, it will maintain in an
account cash or highquality liquid debt securities having an
aggregate net asset value at least equal to the full amount,
accrued on a daily basis, of the Fund's obligations with
respect to any caps or floors. The Fund will not enter into
any interest rate swap, cap or floor transaction unless the
unsecured senior debt or the claims paying ability of the
counterparty thereto is rated at least A by S&P. T. Rowe
Price will monitor the creditworthiness of counterparties on
an ongoing basis. If there is a default by the other parties
to such a transaction, the Fund will have contractual remedies
pursuant to the agreements related to the transaction.
The swap market has grown substantially in recent years with
a large number of banks and investment banking firms acting
both as principals and as agents utilizing standardized swap
documentation. The Manager has determined that, as a result,
the swap market has become relatively liquid. The Fund may
enter into interest rate swaps only with respect to positions
held in its portfolio. Interest rate swaps do not involve the
delivery of securities or other underlying assets or
principal. Accordingly, the risk of loss with respect to
interest rate swaps is limited to the net amount of interest
payments that the Fund is contractually obligated to make. If
the other parties to interest rate swaps default, the Fund's
risk of loss consists of the net amount of interest payments
that the Fund is contractually entitled to receive. Since
interest rate swaps are individually negotiated, the Fund
expects to achieve an acceptable degree of correlation between
its right to receive interest on loan interests and its right
and obligation to receive and pay interest pursuant to
interest rate swaps.
The aggregate purchase price of caps and floors held by the
Fund may not exceed 10% of the Fund's total assets. The Fund
may sell (i.e., write) caps and floors without limitation,
subject to the account coverage requirement described above.
Futures Contracts (All Funds Except Prime Reserve)
Transactions in Futures. Each Fund may enter into futures
contracts (a type of potentially highrisk derivative),
including stock index, interest rate and currency futures
("futures or futures contracts").
Stock index futures contracts may be used to provide a hedge
for a portion of the Fund's portfolio, as a cash management
tool, or as an efficient way for the Manager to implement
either an increase or decrease in portfolio market exposure in
response to changing market conditions. The Fund may purchase
or sell futures contracts with respect to any stock index.
Nevertheless, to hedge the Fund's portfolio successfully, the
Fund must sell futures contacts with respect to indices or
subindices whose movements will have a significant correlation
with movements in the prices of the Fund's portfolio
securities.
Interest rate or currency futures contracts may be used as a
hedge against changes in prevailing levels of interest rates
or currency exchange rates in order to establish more
definitely the effective return on securities or currencies
held or intended to be acquired by the Fund. In this regard,
the Fund could sell interest rate or currency futures as an
offset against the effect of expected increases in interest
rates or currency exchange rates and purchase such futures as
an offset against the effect of expected declines in interest
rates or currency exchange rates.
The Fund will enter into futures contracts which are traded on
national or foreign futures exchanges, and are standardized as
to maturity date and underlying financial instrument. Futures
exchanges and trading in the United States are regulated under
the Commodity Exchange Act by the CFTC. Futures are traded in
London, at the London International Financial Futures
Exchange, in Paris, at the MATIF, and in Tokyo, at the Tokyo
Stock Exchange. Although techniques other than the sale and
purchase of futures contracts could be used for the
abovereferenced 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.
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 inthemoney at
the time of purchase, the inthemoney 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%.
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, highgrade debt
obligations, equal to the market value of the futures
contracts and options thereon (less any related margin
deposits), will be identified in an account with the Fund's
custodian to cover the position, or alternative cover (such as
owning an offsetting position) will be employed. Assets used
as cover or held in an identified account cannot be sold while
the position in the corresponding option or future is open,
unless they are replaced with similar assets. As a result,
the commitment of a large portion of the Fund's assets to
cover or identified accounts could impede portfolio management
or the Fund's ability to meet redemption requests or other
current obligations.
If the CFTC or other regulatory authorities adopt different
(including less stringent) or additional restrictions, the
Fund would comply with such new restrictions.
Trading in Futures Contracts
A futures contract provides for the future sale by one party
and purchase by another party of a specified amount of a
specific financial instrument (e.g., units of a debt security)
for a specified price, date, time and place designated at the
time the contract is made. Brokerage fees are incurred when
a futures contract is bought or sold and margin deposits must
be maintained. Entering into a contract to buy is commonly
referred to as buying or purchasing a contract or holding a
long position. Entering into a contract to sell is commonly
referred to as selling a contract or holding a short position.
Unlike when the Fund purchases or sells a security, no price
would be paid or received by the Fund upon the purchase or
sale of a futures contract. Upon entering into a futures
contract, and to maintain the Fund's open positions in futures
contracts, the Fund would be required to deposit with its
custodian in a segregated account in the name of the futures
broker an amount of cash, U.S. government securities, suitable
money market instruments, or liquid, highgrade debt
securities, known as "initial margin." The margin required
for a particular futures contract is set by the exchange on
which the contract is traded, and may be significantly
modified from time to time by the exchange during the term of
the contract. Futures contracts are customarily purchased and
sold on margins that may range upward from less than 5% of the
value of the contract being traded.
If the price of an open futures contract changes (by increase
in the case of a sale or by decrease in the case of a
purchase) so that the loss on the futures contract reaches a
point at which the margin on deposit does not satisfy margin
requirements, the broker will require an increase in the
margin. However, if the value of a position increases because
of favorable price changes in the futures contract so that the
margin deposit exceeds the required margin, the broker will
pay the excess to that Fund.
These subsequent payments, called "variation margin," to and
from the futures broker, are made on a daily basis as the
price of the underlying assets fluctuate making the long and
short positions in the futures contract more or less valuable,
a process known as "marking to the market." The Fund expects
to earn interest income on its margin deposits.
Although certain futures contracts, by their terms, require
actual future delivery of and payment for the underlying
instruments, in practice most futures contracts are usually
closed out before the delivery date. Closing out an open
futures contract purchase or sale is effected by entering into
an offsetting futures contract sale or purchase, respectively,
for the same aggregate amount of the identical securities and
the same delivery date. If the offsetting purchase price is
less than the original sale price, the Fund realizes a gain;
if it is more, the Fund realizes a loss. Conversely, if the
offsetting sale price is more than the original purchase
price, the Fund realizes a gain; if it is less, the Fund
realizes a loss. The transaction costs must also be included
in these calculations. There can be no assurance, however,
that any Fund will be able to enter into an offsetting
transaction with respect to a particular futures contract at
a particular time. If the Fund is not able to enter into an
offsetting transaction, the Fund will continue to be required
to maintain the margin deposits on the futures contract.
As an example of an offsetting transaction in which the
underlying instrument is not delivered, the contractual
obligations arising from the sale of one contract of September
Treasury Bills on an exchange may be fulfilled at any time
before delivery of the contract is required (i.e., on a
specified date in September, the "delivery month") by the
purchase of one contract of September Treasury Bills on the
same exchange. In such instance, the difference between the
price at which the futures contract was sold and the price
paid for the offsetting purchase, after allowance for
transaction costs, represents the profit or loss to the Fund.
A futures contract on the Standard & Poor's 500 Stock Index,
composed of 500 selected common stocks, most of which are
listed on the New York Stock Exchange, provides an example of
how futures contracts operate. The S&P 500 Index assigns
relative weightings to the common stocks included in the
Index, and the Index fluctuates with changes in the market
values of those common stocks. In the case of futures
contracts on the S&P 500 Index, the contracts are to buy or
sell 500 units. Thus, if the value of the S&P 500 Index were
$150, one contract would be worth $75,000 (500 units x $150).
The contract specifies that no delivery of the actual stocks
making up the index will take place. Instead, settlement in
cash occurs. Over the life of the contract, the gain or loss
realized by the Fund will equal the difference between the
purchase (or sale) price of the contract and the price at
which the contract is terminated. For example, if the Fund
enters into the example contract above and the S&P 500 Index
is at $154 on the termination date, the Fund will gain $2,000
(500 units x gain of $4). If, however, the S&P 500 Index is
at $148 on that future date, the Fund will lose $1,000 (500
units x loss of $2).
Special Risks of Transactions in Futures Contracts
Volatility and Leverage. The prices of futures contracts are
volatile and are influenced, among other things, by actual and
anticipated changes in the market and interest rates, which in
turn are affected by fiscal and monetary policies and national
and international political and economic events.
Most United States futures exchanges limit the amount of
fluctuation permitted in futures contract prices during a
single trading day. The daily limit establishes the maximum
amount that the price of a futures contract may vary either up
or down from the previous day's settlement price at the end of
a trading session. Once the daily limit has been reached in
a particular type of futures contract, no trades may be made
on that day at a price beyond that limit. The daily limit
governs only price movement during a particular trading day
and therefore does not limit potential losses, because the
limit may prevent the liquidation of unfavorable positions.
Futures contract prices have occasionally moved to the daily
limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of futures
positions and subjecting some futures traders to substantial
losses.
Because of the low margin deposits required, futures trading
involves an extremely high degree of leverage. As a result,
a relatively small price movement in a futures contract may
result in immediate and substantial loss, as well as gain, to
the investor. For example, if at the time of purchase, 10% of
the value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract
would result in a total loss of the margin deposit, before any
deduction for the transaction costs, if the account were then
closed out. A 15% decrease would result in a loss equal to
150% of the original margin deposit, if the contract were
closed out. Thus, a purchase or sale of a futures contract
may result in losses in excess of the amount invested in the
futures contract. However, the Fund would presumably have
sustained comparable losses if, instead of the futures
contract, it had invested in the underlying financial
instrument and sold it after the decline. Furthermore, in the
case of a futures contract purchase, in order to be certain
that the Fund has sufficient assets to satisfy its obligations
under a futures contract, the Fund earmarks to the futures
contract money market instruments equal in value to the
current value of the underlying instrument less the margin
deposit.
Liquidity. The Fund may elect to close some or all of its
futures positions at any time prior to their expiration. The
Fund would do so to reduce exposure represented by long
futures positions or short futures positions. The Fund may
close its positions by taking opposite positions which would
operate to terminate the Fund's position in the futures
contracts. Final determinations of variation margin would
then be made, additional cash would be required to be paid by
or released to the Fund, and that Fund would realize a loss or
a gain.
Futures contracts may be closed out only on the exchange or
board of trade where the contracts were initially traded.
Although the Fund intends to purchase or sell futures
contracts only on exchanges or boards of trade where there
appears to be an active market, there is no assurance that a
liquid market on an exchange or board of trade will exist for
any particular contract at any particular time. In such
event, it might not be possible to close a futures contract,
and in the event of adverse price movements, the Fund would
continue to be required to make daily cash payments of
variation margin. However, in the event futures contracts
have been used to hedge the underlying instruments, the Fund
would continue to hold the underlying instruments subject to
the hedge until the futures contracts could be terminated. In
such circumstances, an increase in the price of underlying
instruments, if any, might partially or completely offset
losses on the futures contract. However, as described below,
there is no guarantee that the price of the underlying
instruments will, in fact, correlate with the price movements
in the futures contract and thus provide an offset to losses
on a futures contract.
Hedging Risk. A decision of whether, when, and how to hedge
involves skill and judgment, and even a wellconceived hedge
may be unsuccessful to some degree because of unexpected
market behavior, market or interest rate trends. There are
several risks in connection with the use by the Fund of
futures contracts as a hedging device. One risk arises
because of the imperfect correlation between movements in the
prices of the futures contracts and movements in the prices of
the underlying instruments which are the subject of the hedge.
The Manager will, however, attempt to reduce this risk by
entering into futures contracts whose movements, in its
judgment, will have a significant correlation with movements
in the prices of the Fund's underlying instruments sought to
be hedged.
Successful use of futures contracts by the Fund for hedging
purposes is also subject to the Manager's ability to correctly
predict movements in the direction of the market. It is
possible that, when the Fund has sold futures to hedge its
portfolio against a decline in the market, the index, indices,
or instruments underlying futures might advance and the value
of the underlying instruments held in the Fund's portfolio
might decline. If this were to occur, the Fund would lose
money on the futures and also would experience a decline in
value in its underlying instruments. However, while this
might occur to a certain degree, the Manager believes that
over time the value of the Fund's portfolio will tend to move
in the same direction as the market indices used to hedge the
portfolio. It is also possible that if the Fund were to hedge
against the possibility of a decline in the market (adversely
affecting the underlying instruments held in its portfolio)
and prices instead increased, the Fund would lose part or all
of the benefit of increased value of those underlying
instruments that it has hedged, because it would have
offsetting losses in its futures positions. In addition, in
such situations, if the Fund had insufficient cash, it might
have to sell underlying instruments to meet daily variation
margin requirements. Such sales of underlying instruments
might be, but would not necessarily be, at increased prices
(which would reflect the rising market). The Fund might have
to sell underlying instruments at a time when it would be
disadvantageous to do so.
In addition to the possibility that there might be an
imperfect correlation, or no correlation at all, between price
movements in the futures contracts and the portion of the
portfolio being hedged, the price movements of futures
contracts might not correlate perfectly with price movements
in the underlying instruments due to certain market
distortions. First, all participants in the futures market
are subject to margin deposit and maintenance requirements.
Rather than meeting additional margin deposit requirements,
investors might close futures contracts through offsetting
transactions, which could distort the normal relationship
between the underlying instruments and futures markets.
Second, the margin requirements in the futures market are less
onerous than margin requirements in the securities markets,
and as a result the futures market might attract more
speculators than the securities markets do. Increased
participation by speculators in the futures market might also
cause temporary price distortions. Due to the possibility of
price distortion in the futures market and also because of the
imperfect correlation between price movements in the
underlying instruments and movements in the prices of futures
contracts, even a correct forecast of general market trends by
the Manager might not result in a successful hedging
transaction over a very short time period.
Options on Futures Contracts
Each Fund may purchase and sell options on the same types of
futures in which it may invest.
Options (another type of potentially highrisk derivative) on
futures are similar to options on underlying instruments
except that options on futures give the purchaser the right,
in return for the premium paid, to assume a position in a
futures contract (a long position if the option is a call and
a short position if the option is a put), rather than to
purchase or sell the futures contract, at a specified exercise
price at any time during the period of the option. Upon
exercise of the option, the delivery of the futures position
by the writer of the option to the holder of the option will
be accompanied by the delivery of the accumulated balance in
the writer's futures margin account which represents the
amount by which the market price of the futures contract, at
exercise, exceeds (in the case of a call) or is less than (in
the case of a put) the exercise price of the option on the
futures contract. Purchasers of options who fail to exercise
their options prior to the exercise date suffer a loss of the
premium paid.
As an alternative to writing or purchasing call and put
options on interest rate futures, the Fund may write or
purchase call and put options on financial indices. Such
options would be used in a manner similar to the use of
options on futures contracts. From time to time, a single
order to purchase or sell futures contracts (or options
thereon) may be made on behalf of the Fund and other T. Rowe
Price Funds. Such aggregated orders would be allocated among
the Funds and the other T. Rowe Price Funds in a fair and
nondiscriminatory manner.
Special Risks of Transactions in Options on Futures Contracts
The risks described under "Special Risks of Transactions on
Futures Contracts" are substantially the same as the risks of
using options on futures. In addition, where the Fund seeks
to close out an option position by writing or buying an
offsetting option covering the same index, underlying
instrument or contract and having the same exercise price and
expiration date, its ability to establish and close out
positions on such options will be subject to the maintenance
of a liquid secondary market. Reasons for the absence of a
liquid secondary market on an exchange include the following:
(i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an exchange on
opening transactions or closing transactions or both; (iii)
trading halts, suspensions or other restrictions may be
imposed with respect to particular classes or series of
options, or underlying instruments; (iv) unusual or unforeseen
circumstances may interrupt normal operations on an exchange;
(v) the facilities of an exchange or a clearing corporation
may not at all times be adequate to handle current trading
volume; or (vi) one or more exchanges could, for economic or
other reasons, decide or be compelled at some future date to
discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on
that exchange (or in the class or series of options) would
cease to exist, although outstanding options on the exchange
that had been issued by a clearing corporation as a result of
trades on that exchange would continue to be exercisable in
accordance with their terms. There is no assurance that
higher than anticipated trading activity or other unforeseen
events might not, at times, render certain of the facilities
of any of the clearing corporations inadequate, and thereby
result in the institution by an exchange of special procedures
which may interfere with the timely execution of customers'
orders.
Additional Futures and Options Contracts
Although the Funds have no current intention of engaging in
futures or options transactions other than those described
above, they reserve the right to do so. Such futures and
options trading might involve risks which differ from those
involved in the futures and options described above.
Foreign Futures and Options
Participation in foreign futures and foreign options
transactions involves the execution and clearing of trades on
or subject to the rules of a foreign board of trade. Neither
the National Futures Association nor any domestic exchange
regulates activities of any foreign boards of trade, including
the execution, delivery and clearing of transactions, or has
the power to compel enforcement of the rules of a foreign
board of trade or any applicable foreign law. This is true
even if the exchange is formally linked to a domestic market
so that a position taken on the market may be liquidated by a
transaction on another market. Moreover, such laws or
regulations will vary depending on the foreign country in
which the foreign futures or foreign options transaction
occurs. For these reasons, when the Fund trades foreign
futures or foreign options contracts, it may not be afforded
certain of the protective measures provided by the Commodity
Exchange Act, the CFTC's regulations and the rules of the
National Futures Association and any domestic exchange,
including the right to use reparations proceedings before the
Commission and arbitration proceedings provided by the
National Futures Association or any domestic futures exchange.
In particular, funds received from the Fund for foreign
futures or foreign options transactions may not be provided
the same protections as funds received in respect of
transactions on United States futures exchanges. In addition,
the price of any foreign futures or foreign options contract
and, therefore, the potential profit and loss thereon may be
affected by any variance in the foreign exchange rate between
the time the Fund's order is placed and the time it is
liquidated, offset or exercised.
Foreign Currency Transactions
A forward foreign currency exchange contract involves an
obligation to purchase or sell a specific currency at a future
date, which may be any fixed number of days from the date of
the contract agreed upon by the parties, at a price set at the
time of the contract. These contracts are principally traded
in the interbank market conducted directly between currency
traders (usually large, commercial banks) and their customers.
A forward contract generally has no deposit requirement, and
no commissions are charged at any stage for trades.
Each Fund may enter into forward contracts for a variety of
purposes in connection with the management of the foreign
securities portion of its portfolio. The Fund's use of such
contracts would include, but not be limited to, the following:
First, when the Fund enters into a contract for the purchase
or sale of a security denominated in a foreign currency, it
may desire to "lock in" the U.S. dollar price of the security.
By entering into a forward contract for the purchase or sale,
for a fixed amount of dollars, of the amount of foreign
currency involved in the underlying security transactions, the
Fund will be able to protect itself against a possible loss
resulting from an adverse change in the relationship between
the U.S. dollar and the subject foreign currency during the
period between the date the security is purchased or sold and
the date on which payment is made or received.
Second, when the Manager believes that one currency may
experience a substantial movement against another currency,
including the U.S. dollar, it may enter into a forward
contract to sell or buy the amount of the former foreign
currency, approximating the value of some or all of the Fund's
portfolio securities denominated in such foreign currency.
Alternatively, where appropriate, the Fund may hedge all or
part of its foreign currency exposure through the use of a
basket of currencies or a proxy currency where such currency
or currencies act as an effective proxy for other currencies.
In such a case, the Fund may enter into a forward contract
where the amount of the foreign currency to be sold exceeds
the value of the securities denominated in such currency. The
use of this basket hedging technique may be more efficient and
economical than entering into separate forward contracts for
each currency held in the Fund. The precise matching of the
forward contract amounts and the value of the securities
involved will not generally be possible since the future value
of such securities in foreign currencies will change as a
consequence of market movements in the value of those
securities between the date the forward contract is entered
into and the date it matures. The projection of shortterm
currency market movement is extremely difficult, and the
successful execution of a shortterm hedging strategy is highly
uncertain. Under normal circumstances, consideration of the
prospect for currency parities will be incorporated into the
longer term investment decisions made with regard to overall
diversification strategies. However, the Manager believes
that it is important to have the flexibility to enter into
such forward contracts when it determines that the best
interests of the Fund will be served. Third, the Fund may use
forward contracts when the Fund wishes to hedge out of the
dollar into a foreign currency in order to create a synthetic
bond or money market instrumentthe security would be issued in
U.S. dollars but the dollar component would be transformed
into a foreign currency through a forward contract.
The Fund may enter into forward contacts for any other purpose
consistent with that Fund's investment objective and program.
However, the Fund will not enter into a forward contract, or
maintain exposure to any such contract(s), if the amount of
foreign currency required to be delivered thereunder would
exceed the Fund's holdings of liquid, highgrade debt
securities and currency available for cover of the forward
contract(s) or other suitable cover. 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 currencydenominated securities and will
not do so unless deemed appropriate by the Manager. It also
should be realized that this method of hedging against a
decline in the value of a currency does not eliminate
fluctuations in the underlying prices of the securities. It
simply establishes a rate of exchange at a future date.
Additionally, although such contracts tend to minimize the
risk of loss due to a decline in the value of the hedged
currency, at the same time, they tend to limit any potential
gain which might result from an increase in the value of that
currency.
Although the Fund values its assets daily in terms of U.S.
dollars, it does not intend to convert its holdings of foreign
currencies into U.S. dollars on a daily basis. It will do so
from time to time, and investors should be aware of the costs
of currency conversion. Although foreign exchange dealers do
not charge a fee for conversion, they do realize a profit
based on the difference (the "spread") between the prices at
which they are buying and selling various currencies. Thus,
a dealer may offer to sell a foreign currency to the Fund at
one rate, while offering a lesser rate of exchange should the
Fund desire to resell that currency to the dealer.
Federal Tax Treatment of Options, Futures Contracts and
Forward Foreign Exchange Contracts (All Funds Except Prime
Reserve)
Each Fund may enter into certain option, futures, and forward
foreign exchange contracts, including options and futures on
currencies, which will be treated as Section 1256 contracts or
straddles.
Transactions which are considered Section 1256 contracts will
be considered to have been closed at the end of the Fund's
fiscal year and any gains or losses will be recognized for tax
purposes at that time. Such gains or losses from the normal
closing or settlement of such transactions will be
characterized as 60% longterm capital gain or loss and 40%
shortterm 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 "inthemoney 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 longterm capital losses, if the
security covering the option was held for more than twelve
months prior to the writing of the option.
In order for the Fund to continue to qualify for federal
income tax treatment as a regulated investment company, at
least 90% of its gross income for a taxable year must be
derived from qualifying income; i.e., dividends, interest,
income derived from loans of securities, and gains from the
sale of securities or currencies. Pending tax regulations
could limit the extent that net gain realized from option,
futures or foreign forward exchange contracts on currencies is
qualifying income for purposes of the 90% requirement. In
addition, gains realized on the sale or other disposition of
securities, including option, futures or foreign forward
exchange contracts on securities or securities indexes and, in
some cases, currencies, held for less than three months, must
be limited to less than 30% of the Fund's annual gross income.
In order to avoid realizing excessive gains on securities or
currencies held less than three months, the Fund may be
required to defer the closing out of option, futures or
foreign forward exchange contracts beyond the time when it
would otherwise be advantageous to do so. It is anticipated
that unrealized gains on Section 1256 option, futures and
foreign forward exchange contracts, which have been open for
less than three months as of the end of the Fund's fiscal year
and which are recognized for tax purposes, will not be
considered gains on securities or currencies held less than
three months for purposes of the 30% test.
Investment
Restrictions
Fundamental policies may not be changed without the approval
of the lesser of (1) 67% of each Fund's shares present at a
meeting of shareholders if the holders of more than 50% of the
outstanding shares are present in person or by proxy or (2)
more than 50% of each Fund's outstanding shares. Other
restrictions in the form of operating policies are subject to
change by the Fund's Board of Directors without shareholder
approval. Any investment restriction which involves a maximum
percentage of securities or assets shall not be considered to
be violated unless an excess over the percentage occurs
immediately after, and is caused by, an acquisition of
securities or assets of, or borrowings by, the Fund.
Fundamental Policies
As a matter of fundamental policy, each Fund may not:
(1) Borrowing. Borrow money except that the Fund may (i)
borrow for nonleveraging, temporary or emergency purposes
and (ii) engage in reverse repurchase agreements and make
other investments or engage in other transactions, which
may involve a borrowing, in a manner consistent with the
Fund's investment objective and program, provided that
the combination of (i) and (ii) shall not exceed 33 1/3%
of the value of the Fund's total assets (including the
amount borrowed) less liabilities (other than borrowings)
or such other percentage permitted by law. Any
borrowings which come to exceed this amount will be
reduced in accordance with applicable law. The Fund may
borrow from banks, other Price Funds or other persons to
the extent permitted by applicable law.
(2) Commodities. Purchase or sell physical commodities;
except that the Fund may enter into futures contracts and
options thereon;
(3) Industry Concentration. Purchase the securities of any
issuer if, as a result, more than 25% of the value of the
Fund's total assets would be invested in the securities
of issuers having their principal business activities in
the same industry;
(4) Loans. Make loans, although the Fund may (i) lend
portfolio securities and participate in an interfund
lending program with other Price Funds provided that no
such loan may be made if, as a result, the aggregate of
such loans would exceed 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 publiclydistributed or privatelyplaced 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
abovedescribed fundamental policies. The notes are not
fundamental policies.
With respect to investment restrictions (1) and (4) the Fund
will not borrow from or lend to any other T. Rowe Price Fund
unless each Fund applies for and receives an exemptive order
from the SEC or the SEC issues rules permitting such
transactions. The Funds have no current intention of engaging
in any such activity and there is no assurance the SEC would
grant any order requested by the Fund or promulgate any rules
allowing the transactions.
With respect to investment restriction (2), the Fund does not
consider currency contracts or hybrid instruments to be
commodities.
For purposes of investment restriction (3), U.S., state or
local governments, or related agencies or instrumentalities,
are not considered an industry. Industries are determined by
reference to the classifications of industries set forth in
the Fund's Semiannual and Annual Reports.
For purposes of investment restriction (4), the Fund will
consider the acquisition of a debt security to include the
execution of a note or other evidence of an extension of
credit with a term of more than nine months.
For purposes of investment restriction (5), the Fund will
consider a repurchase agreement fully collateralized with U.S.
government securities to be U.S. government securities.
Operating Policies
As a matter of operating policy, the Fund may not:
(1) Borrowing. The Fund will not purchase additional
securities when money borrowed exceeds 5% of its total
assets.
(2) Control of Portfolio Companies. Invest in companies for
the purpose of exercising management or control;
(3) Equity Securities (LimitedTerm Bond, Personal Strategy
Balanced, and Prime Reserve Portfolios). Purchase any
equity securities, or securities convertible into
equity securities except as set forth in its prospectus
and in its operating policy on investment companies.
(4) Futures Contracts.
(a) All Funds Except Prime Reserve: 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;
(b) Prime Reserve Portfolio: Purchase a futures
contract or an option thereon.
(5) Illiquid Securities. Purchase illiquid securities
issuers if, as a result, more than 15% (10% for the
Prime Reserve Portfolio) of the Fund's net assets would
be invested in such securities.
(6) Investment Companies.
(a) All Funds Except Prime Reserve: Purchase
securities of openend or closedend investment
companies except in compliance with the
Investment Company Act of 1940;
(b) Prime Reserve Portfolio: Purchase securities
of other money market funds, except in
compliance with the Investment Company Act of
1940.
(7) Margin. Purchase securities on margin, except (i) for
use of shortterm credit necessary for clearance of
purchases of portfolio securities and (ii) it may make
margin deposits in connection with futures contracts or
other permissible investments;
(8) Mortgaging. Mortgage, pledge, hypothecate or, in any
manner, transfer any security owned by the Fund as
security for indebtedness except as may be necessary in
connection with permissible borrowings or investments
and then such mortgaging, pledging or hypothecating may
not exceed 33 1/3% of the Fund's total assets at the
time of borrowing or investment;
(9) Oil and Gas Programs. Purchase participations or other
direct interests or enter into leases with respect to,
oil, gas, or other mineral exploration or development
programs if, as a result thereof more than 5% of the
value of the total assets of the Fund would be invested
in such programs;
(10) Options, etc. Invest in puts, calls, straddles,
spreads, or any combination thereof, except to the
extent permitted by the prospectus and Statement of
Additional Information;
(11) Short Sales. Effect short sales of securities;
(12) Warrants.
(a) All Funds Except Prime Reserve: Invest in
warrants if, as a result thereof, more than
10% of the value of the net assets of the Fund
would be invested in warrants;
(b) Prime Reserve Portfolio: Invest in warrants
except to the extent permitted by the
prospectus and Statement of Additional
Information.
All Funds (Except Prime Reserve)
Notwithstanding anything in the above fundamental and
operating restrictions to the contrary, each Fund may invest
all of its assets in a single investment company or a series
thereof in connection with a "masterfeeder" arrangement. Such
an investment would be made where the Fund (a "Feeder"), and
one or more other Funds with the same investment objective and
program as that Fund, sought to accomplish its investment
objective and program by investing all of its assets in the
shares of another investment company (the "Master"). The
Master would, in turn, have the same investment objective and
program as that Fund. The Fund would invest in this manner in
an effort to achieve the economies of scale associated with
having a Master fund make investments in portfolio companies
on behalf of a number of Feeder funds.
International Stock Portfolio
In addition to the restrictions described above, some foreign
countries limit, or prohibit, all direct foreign investment in
the securities of their companies. However, the governments
of some countries have authorized the organization of
investment funds to permit indirect foreign investment in such
securities. For tax purposes these funds may be known as
Passive Foreign Investment Companies. The Fund is subject to
certain percentage limitations under the 1940 Act and certain
states relating to the purchase of securities of investment
companies, and may be subject to the limitation that no more
than 10% of the value of the Fund's total assets may be
invested in such securities.
Yield Information
Prime Reserve Portfolio
From time to time, the Fund may advertise a yield figure
calculated in the following manner:
The Fund's current and historical yield for a period is
calculated by dividing the net change in value of an account
(including all dividends accrued and dividends reinvested in
additional shares) by the account value at the beginning of
the period to obtain the base period return. This base period
return is divided by the number of days in the period, then
multiplied by 365 to arrive at the annualized yield for that
period. The Fund's annualized compound yield for such period
is compounded by dividing the base period return by the number
of days in the period, and compounding that figure over 365
days.
LimitedTerm Bond Portfolio
An income factor is calculated for each security in the
portfolio based upon the security's market value at the
beginning of the period and yield as determined in conformity
with regulation of the Securities and Exchange Commission. The
income factors are then totalled for all securities in the
portfolio. Next, expenses of the Fund for the period net of
expected reimbursement are deducted from the income to arrive
at net income, which is then converted to a pershare amount by
dividing net income by the average number of shares
outstanding during the period. The net income per share is
divided by the net asset value on the last day of the period
to produce a monthly yield which is then annualized. Quoted
yield factors are for comparison purposes only, and are not
intended to indicate future performance or forecast the
dividend per share of the Fund.
The yield of the Fund calculated under the abovedescribed
method for the month ended December 31, 1996, was 5.84%.
Investment
Performance
Total Return Performance. Each Fund's calculation of total
return performance includes the reinvestment of all capital
gain distributions and income dividends for the period or
periods indicated, without regard to tax consequences to a
shareholder in the Fund. Total return is calculated as the
percentage change between the beginning value of a static
account in the Fund and the ending value of that account
measured by the then current net asset value, including all
shares acquired through reinvestment of income and capital
gains dividends. The results shown are historical and should
not be considered indicative of the future performance of the
Fund. Each average annual compound rate of return is derived
from the cumulative performance of the Fund over the time
period specified. The annual compound rate of return for the
Fund over any other period of time will vary from the average.
____________________________________________________________
___________
Cumulative Performance Percentage Change
____________________________________________________________
___________
1 Yr. Since
Ended Inception to
12/31/96 12/31/96
____________________________________________________________
___________
LimitedTerm Bond Portfolio 3.26% 16.43%
(5/13/94)
____________________________________________________________
___________
Equity Income Portfolio 19.56 72.63
(3/31/94)
____________________________________________________________
___________
Personal Strategy Balanced Portfolio 14.21 46.94
(12/30/94)
____________________________________________________________
___________
New America Growth Portfolio 20.09 83.25
(3/31/94)
____________________________________________________________
___________
International Stock Portfolio 14.70 29.82
(3/31/94)
____________________________________________________________
___________
Average Annual Compound Rates of Return
____________________________________________________________
___________
1 Yr. Since
Ended Inception to
12/31/96 12/31/96
____________________________________________________________
___________
LimitedTerm Bond Portfolio 3.26% 5.94%
(5/13/94)
____________________________________________________________
___________
Equity Income Portfolio 19.56 21.93
(3/31/94)
____________________________________________________________
___________
Personal Strategy Balanced Portfolio 14.21 21.22
(12/30/94)
____________________________________________________________
___________
New America Growth Portfolio 20.09 24.60
(3/31/94)
____________________________________________________________
___________
International Stock Portfolio 14.70 9.94
(3/31/94)
____________________________________________________________
___________
Outside Sources of Information
From time to time, in reports and promotional literature: (1)
the Fund's total return performance, ranking, or any other
measure of the Fund's performance may be compared to any one
or combination of the following: (i) a broadbased index; (ii)
other groups of mutual funds, including T. Rowe Price Funds,
tracked by: independent research firms, ranking entities, or
other financial publications; (iii) indices of stocks
comparable to those in which the fund invests; (2) the
Consumer Price Index (or any other measure for inflation),
government statistics, such as GNP, may be used to illustrate
investment attributes of the Fund or the general economic,
business, investment, or financial environment in which the
Fund operates; (3) various financial, economic, and market
statistics developed by brokers, dealers, and other persons
may be used to illustrate aspects of the Fund's performance;
(4) the effect of taxdeferred compounding on the Fund's
investment returns, or on returns in general, in both
qualified and nonqualified retirement plans or any other
taxadvantaged product, may be illustrated by graphs, charts,
etc.; and (5) the sectors or industries in which the Fund
invests may be compared to relevant indices or surveys in
order to evaluate the Fund's historical performance or current
or potential value with respect to the particular industry or
sector.
Other Features and Benefits
Each Fund is a member of the T. Rowe Price Family of Funds and
may help investors achieve various longterm investment goals,
which include, but are not limited to, 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.
Other Publications
From time to time, in newsletters and other publications
issued by T. Rowe Price Investment Services, Inc., T. Rowe
Price mutual fund portfolio managers may discuss economic,
financial, and political developments in the U.S. and abroad
and how these conditions have affected or may affect
securities prices or the fund, individual securities within
the Fund's portfolio, and their philosophy regarding the
selection of individual stocks, including why specific stocks
have been added, removed, or excluded from the Fund's
portfolio.
Redemptions in Kind
In the unlikely event a shareholder of any Fund were to
receive an in kind redemption of portfolio securities of the
Fund, brokerage fees could be incurred by the shareholder in
subsequent sale of such securities.
Issuance of Fund Shares for Securities
Transactions involving issuance of Fund shares for securities
or assets other than cash will be limited to (1) bona fide
reorganizations; (2) statutory mergers; or (3) other
acquisitions of portfolio securities that: (a) meet the
investment objective and policies of the Fund; (b) are
acquired for investment and not for resale except in
accordance with applicable law; (c) have a value that is
readily ascertainable via listing on or trading in a
recognized U.S. or international exchange or market; and (d)
are not illiquid.
Management of Fund
The officers and directors of each Fund are listed below.
Unless otherwise noted, the address of each is 100 East Pratt
Street, Baltimore, Maryland 21202. Except as indicated, each
has been an employee of the Manager for more than five years.
In the list below, each Fund's directors who are considered
"interested persons" of the Manager as defined under Section
2(a)(19) of the Investment Company Act of 1940 are noted with
an asterisk (*). These directors are referred to as inside
directors by virtue of their officership, directorship, and/or
employment with the Manager.
Officers (All Funds)
HENRY H. HOPKINS, Vice President Director and 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
PriceFleming International, Inc. and T. Rowe Price Retirement
Plan Services, Inc.
LENORA V. HORNUNG, Secretary Vice President, T. Rowe Price
PATRICIA S. BUTCHER, Assistant Secretary Assistant Vice
President, T. Rowe Price and T. Rowe Price Investment
Services, Inc.
CARMEN F. DEYESU, Treasurer Vice President, T. Rowe Price, T.
Rowe Price Services, Inc., and T. Rowe Price Trust Company
DAVID S. MIDDLETON, Controller Vice President, T. Rowe Price,
T. Rowe Price Services, Inc., and T. Rowe Price Trust Company
INGRID I. VORDEMBERGE, Assistant Vice President Employee, T.
Rowe Price
Independent Directors
Equity Income, New America Growth, MidCap Growth, and Personal
Strategy Balanced Portfolios
DONALD W. DICK JR., Director Principal, EuroCapital Advisors,
LLC, an acquisition and management advisory firm; formerly
(5/896/95) Principal, Overseas Partners, Inc., a financial
investment firm; formerly (6/653/89) Director and Vice
PresidentConsumer Products Division, McCormick & Company,
Inc., international food processors; Director, Waverly, Inc.,
Baltimore, Maryland; Address: P.O. Box 491, Chilmark, MA
025350491
DAVID K. FAGIN, Director Chairman, Chief Executive Officer
and Director, Golden Star Resources, Ltd.; formerly (19867/91)
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 (199192), Nan
Duskin, Inc., a women's specialty store, Director (19841990)
and Chairman (198990) Federal Reserve Bank of Richmond, and
President and Chief Executive Officer (198889), Honeybee,
Inc., a division of Spiegel, Inc.; Director, Ann Taylor
Stores, Central Illinois Public Service Company, CIPSCO
Incorporated, The Rouse Company, State Farm Mutual Automobile
Insurance Company and USAir Group, Inc.; Address: 3201 New
Mexico Avenue, N.W., Suite 350, Washington, D.C. 20016.
HUBERT D. VOS, Director President, Stonington Capital
Corporation, a private investment company; Address: 1114 State
Street, Suite 247, Santa Barbara, California 931900409
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
943041005
LimitedTerm Bond Portfolio and Prime Reserve Portfolio
ROBERT P. BLACK, Director Retired; formerly President,
Federal Reserve Bank of Richmond; Address: 10 Dahlgren Road,
Richmond, Virginia 23233
CALVIN W. BURNETT, PH.D., Director President, Coppin State
College; Director, Maryland Chamber of Commerce and Provident
Bank of Maryland; Former President, Baltimore Area Council Boy
Scouts of America; Vice President, Board of Directors, The
Walters Art Gallery; Address: 2500 West North Avenue,
Baltimore, Maryland 21216
ANTHONY W. DEERING, Director Director, President and Chief
Executive Officer, The Rouse Company, real estate developers,
Columbia, Maryland; Advisory Director, Kleinwort, Benson
(North America) Corporation, a registered brokerdealer;
Address: 10275 Little Patuxent Parkway, Columbia, Maryland
21044
F. PIERCE LINAWEAVER, Director President, F. Pierce
Linaweaver & Associates, Inc.; formerly (19871991) Executive
Vice President, EA Engineering, Science, and Technology, Inc.,
and (19871990) President, EA Engineering, Inc., Baltimore,
Maryland; Address: The Legg Mason Tower, 111 South Calvert
Street, Suite 2700, Baltimore, Maryland 21202
JOHN G. SCHREIBER, Director President, Schreiber Investments,
Inc., a real estate investment company; Director AMLI
Residential Properties Trust; Partner, Blackstone Real Estate
Partners, L.P.; Director and formerly (12/7012/90) Executive
Vice President, JMB Realty Corporation, a national real estate
investment manager and developer; Director, Urban Shopping
Centers, Inc.; Address: 1115 East Illinois Road, Lake Forest,
Illinois 60045
International Stock Portfolio
ANTHONY W. DEERING, Director Director, President and Chief
Executive Officer, The Rouse Company, real estate developers,
Columbia, Maryland; Advisory Director, Kleinwort, Benson
(North America) Corporation, a registered brokerdealer;
Address: 10275 Little Patuxent Parkway, Columbia, Maryland
21044
DONALD W. DICK JR., Director Principal, EuroCapital Advisors,
LLC, an acquisition and management advisory firm; formerly
(5/896/95) Principal, Overseas Partners, Inc., a financial
investment firm; formerly (6/653/89) Director and Vice
PresidentConsumer Products Division, McCormick & Company,
Inc., international food processors; Director, Waverly, Inc.,
Baltimore, Maryland; Address: P.O. Box 491, Chilmark, MA
025350491
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
Officers and Directors
LimitedTerm Bond and Prime Reserve Portfolios
*JAMES S. RIEPE, Vice President and Director Vice Chairman of
the Board and Managing Director, T. Rowe Price; Chairman of
the Board, T. Rowe Price Services, Inc., T. Rowe Price
Retirement Plan Services, Inc., T. Rowe Price Trust Company,
and T. Rowe Price Investment Services, Inc.; Director,
RhonePoulenc Rorer, Inc.
M. DAVID TESTA, Director Chairman of the Board, PriceFleming;
Vice Chairman of the Board, Chief Investment Officer, and
Managing Director, T. Rowe Price; Vice President and Director,
T. Rowe Price Trust Company; Chartered Financial Analyst;
Chartered Investment Counselor
WILLIAM T. REYNOLDS, Chairman of the Board Director and
Managing Director, T. Rowe Price
PETER VAN DYKE, President Managing Director, T. Rowe Price,
Vice President, PriceFleming and T. Rowe Price Trust Company
EDWARD A. WIESE, Executive President Vice President, T. Rowe
Price, Rowe PriceFleming International, Inc. and T. Rowe Price
Trust Company
ROBERT P. CAMPBELL, Vice President Vice President, T. Rowe
Price and Rowe PriceFleming International, Inc.; formerly
(4/805/90) Vice President and Director, Private Finance, New
York Life Insurance Company, New York, New York
CHRISTY M. DIPIETRO, Vice President Vice President, T. Rowe
Price and T. Rowe Price Trust Company
JAMES M. MCDONALD, Vice President Vice President, T. Rowe
Price
ROBERT M. RUBINO, Vice President Vice President, T. Rowe
Price
EDWARD T. SCHNEIDER, Vice President Vice President, T. Rowe
Price
CHERYL A. REDWOOD, Vice President Assistant Vice President,
T. Rowe Price
PATRICE L. BERCHTENBREITER, Vice PresidentVice President, T.
Rowe Price
PAUL W. BOLTZ, Vice PresidentVice President and Financial
Economist of T. Rowe Price
STEVEN G. BROOKS, Vice PresidentVice President, T. Rowe Price;
Chartered Financial Analyst
ROBERT P. CAMPBELL, Vice PresidentVice President, T. Rowe
Price and PriceFleming; formerly Vice President and Director,
Private Finance, New York Life Insurance Company, New York,
New York
PATRICK S. CASSIDY, Vice PresidentVice President, T. Rowe
Price; Chartered Financial Analyst
DONNA M. DAVISENNIS, Vice PresidentAssistant Vice President,
T. Rowe Price
CHRISTY M. DIPIETRO, Vice PresidentVice President, T. Rowe
Price and T. Rowe Price Trust Company
CHARLES B. HILL, Vice PresidentVice President, T. Rowe Price
JAMES M. McDONALD, Vice PresidentVice President, T. Rowe Price
VIRGINIA A. STIRLING, Vice PresidentVice President, T. Rowe
Price; formerly Vice President, Thomson Bank Watch and
Standard & Poor's Corp.
MARK J. VASELKIV, Vice PresidentVice President, T. Rowe Price
GWENDOLYN G. WAGNER, Vice PresidentVice President and
Economist, T. Rowe Price; Chartered Financial Analyst
BRIAN E. BURNS, Assistant Vice PresidentAssistant Vice
President, T. Rowe Price
JOAN R. POTEE, Assistant Vice PresidentVice President, T. Rowe
Price
Equity Income, New America Growth, Personal Strategy Balanced,
and MidCap Growth Portfolios
*JOHN H. LAPORTE, Executive Vice President and Director
Managing Director, T. Rowe Price; Chartered Financial Analyst
*JAMES S. RIEPE, Vice President and Director Vice Chairman of
the Board and 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 PriceFleming International, Inc.
and RhonePoulenc Rorer, Inc.
*M. DAVID TESTA, President and Director Chairman of the
Board, PriceFleming; Vice Chairman of the Board, Chief
Investment Officer, and Managing Director, T. Rowe Price; Vice
President and Director, T. Rowe Price Trust Company; Chartered
Financial Analyst; Chartered Investment Counselor
BRIAN W. H. BERGHUIS, Executive Vice President Vice
President, T. Rowe Price; Chartered Financial Analyst
BRIAN C. ROGERS, Executive Vice President Director and
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
THOMAS J. HUBER, Vice President Assistant Vice President, 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, T. Rowe
Price; Chartered Financial Analyst
CHARLES G. PEPIN, Vice President Assistant Vice President, 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
J. JEFFREY LANG, Assistant Vice President Assistant Vice
President, T. Rowe Price
Each Fund's Executive Committee, composed 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.
International Stock Portfolio
*M. DAVID TESTA, Chairman of the Board Chairman of the Board,
Rowe PriceFleming International, Inc.; Vice Chairman of the
Board, Chief Investment Officer, and Managing Director, T.
Rowe Price; Vice President and Director, T. Rowe Price Trust
Company; Chartered Financial Analyst; Chartered Investment
Counselor
*MARTIN G. WADE, President and Director President and
Director PriceFleming; Director, Robert Fleming Holdings
Limited and Robert Fleming Asset Management; Address: 25
Copthall Avenue, London, EC2R 7DR, England
CHRISTOPHER D. ALDERSON, Vice President Vice President,
PriceFleming
PETER B. ASKEW, Vice President Executive Vice President,
PriceFleming
RICHARD J. BRUCE, Vice President Vice President of
PriceFleming
ROBERT P. CAMPBELL, Vice President Vice President, T. Rowe
Price and PriceFleming
MARK J. T. EDWARDS, Vice President Vice President,
PriceFleming
JOHN R. FORD, Vice President Executive Vice President,
PriceFleming
STEPHEN ILOTT, Vice President Vice President, PriceFleming
GEORGE A. MURNAGHAN, Vice President Managing Director, T.
Rowe Price, Vice President, PriceFleming; T. Rowe Price Trust
Company and T. Rowe Price Investment Services, Inc.
JAMES S. RIEPE, Vice President Vice Chairman of the Board and
Managing Director, T. Rowe Price; Chairman of the Board, T.
Rowe Price Services, Inc., T. Rowe Price Retirement Plan
Services, Inc., T. Rowe Price Trust Company, and T. Rowe Price
Investment Services, Inc.; Director, RhonePoulenc Rorer, Inc.
CHRISTOPHER ROTHERY, Vice President Vice President,
PriceFleming
JAMES B. M. SEDDON, Vice President Vice President,
PriceFleming
BENEDICT R. F. THOMAS, Vice President Vice President,
PriceFleming
DAVID J. L. WARREN, Vice President Executive Vice President,
PriceFleming
WILLIAM F. WENDLER II, Vice President Vice President,
PriceFleming, T. Rowe Price and T. Rowe Price Investment
Services, Inc.
EDWARD A. WIESE, Vice President Vice President, T. Rowe
Price, PriceFleming and T. Rowe Price Trust Company
ANN B. CRANMER, Assistant Vice President Vice President,
PriceFleming
ROGER L. FIERY III, Assistant Vice President Vice President,
T. Rowe Price and PriceFleming
LEAH P. HOLMES, Assistant Vice President Vice President,
PriceFleming and Assistant Vice President, T. Rowe Price
Each Fund's Executive Committee, consisting of the Funds'
interested directors, has been authorized by its respective
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 Funds do not pay pension or retirement benefits to its
officers or directors. Also, any director of a Fund who is an
officer or employee of T. Rowe Price or PriceFleming does not
receive any remuneration from the Fund.
____________________________________________________________
__________
Total Compensation
from Fund and
Aggregate Fund Complex
Compensation Paid to
Name of Person, Position from Fund(a) Directors(b)
____________________________________________________________
__________
Equity Income Portfolio
____________________________________________________________
__________
Leo C. Bailey, Director(d) $217 $42,083
____________________________________________________________
__________
Donald W. Dick Jr., Director 977 72,917
____________________________________________________________
__________
David K. Fagin, Director 895 59,167
____________________________________________________________
__________
Addison Lanier, Director(d) 217 42,083
____________________________________________________________
__________
Hanne M. Merriman, Director 895 59,167
____________________________________________________________
__________
Hubert D. Vos, Director 895 59,167
____________________________________________________________
__________
Paul M. Wythes, Director 982 69,667
____________________________________________________________
__________
New America Growth Portfolio
____________________________________________________________
__________
Leo C. Bailey, Director(d) $214 $42,083
____________________________________________________________
__________
Donald W. Dick Jr., Director 969 72,917
____________________________________________________________
__________
David K. Fagin, Director 873 59,167
____________________________________________________________
__________
Addison Lanier, Director(d) 214 42,083
____________________________________________________________
__________
Hanne M. Merriman, Director 873 59,167
____________________________________________________________
__________
Hubert D. Vos, Director 873 59,167
____________________________________________________________
__________
Paul M. Wythes, Director 974 69,667
____________________________________________________________
__________
Personal Strategy Balanced Portfolio
____________________________________________________________
__________
Leo C. Bailey, Director(d) $212 $42,083
____________________________________________________________
__________
Donald W. Dick Jr., Director 958 72,917
____________________________________________________________
__________
David K. Fagin, Director 844 59,167
____________________________________________________________
__________
Addison Lanier, Director(d) 212 42,083
____________________________________________________________
__________
Hanne M. Merriman, Director 844 59,167
____________________________________________________________
__________
Hubert D. Vos, Director 844 59,167
____________________________________________________________
__________
Paul M. Wythes, Director 959 69,667
____________________________________________________________
__________
LimitedTerm Bond Portfolio
____________________________________________________________
__________
Robert P. Black, Director $1,010 $56,917
____________________________________________________________
__________
Calvin W. Burnett, Ph.D, Director 1,01056,917
____________________________________________________________
__________
Anthony W. Deering, Director 1,000 70,667
____________________________________________________________
__________
F. Pierce Linaweaver, Director 1,009 56,917
____________________________________________________________
__________
John G. Schreiber, Director 1,010 56,917
____________________________________________________________
__________
International Stock Portfolio
____________________________________________________________
__________
Leo C. Bailey, Director(d) $405 $42,083
____________________________________________________________
__________
Anthony W. Deering, Director 1,448 70,667
____________________________________________________________
__________
Donald W. Dick Jr., Director 1,621 72,917
____________________________________________________________
__________
Paul M. Wythes, Director(e) 1,403 69,667
____________________________________________________________
__________
MidCap Growth Portfolio(c)
____________________________________________________________
__________
Donald W. Dick, Jr., Director $950(c) $72,917
____________________________________________________________
__________
David K. Fagin, Director 835(c) 59,167
____________________________________________________________
__________
Hanne M. Merriman, Director 835(c) 59,167
____________________________________________________________
__________
Hubert D. Vos, Director 835(c) 59,167
____________________________________________________________
__________
Paul M. Wythes, Director 944(c) 69,667
____________________________________________________________
__________
Prime Reserve Portfolio(c)
____________________________________________________________
__________
Robert P. Black, Director $998(c) $56,917
____________________________________________________________
__________
Calvin W. Burnett, Ph.D., Director 99856,917
____________________________________________________________
__________
Anthony W. Deering, Director 991(c) 70,667
____________________________________________________________
__________
F. Pierce Linaweaver, Director999(c) 56,917
____________________________________________________________
__________
John G. Schreiber, Director 998(c) 56,917
____________________________________________________________
__________
(a)
Amounts in this column are based on compensation accrued
for the period January 1, 1996, through December 31, 1996.
(b)
Amounts in this column are for calendar year 1996. The
Fund complex consisted of 76 Funds as of December 31,
1996.
(c)
Estimated future payments for fiscal year 1997, assuming
same number of meetings attended in 1997 as 1996. All
numbers are approximate.
(d)
Messrs. Bailey and Lanier retired from their positions
with the Funds in April, 1996.
(e)
Mr. Wythes was appointed to the Board of Directors in
January, 1996.
As of the date of the prospectus, the officers and directors
of each Fund as a group, owned less than 1% of the outstanding
shares of the Fund.
Principal Holders
of Securities
Prime Reserve and MidCap Growth Portfolios:
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.
As of March 31, 1997, the following shareholders beneficially
owned more than 5% of the outstanding shares of the fund:
Equity Income Portfolio:
Security Benefit Life Insurance Company, FBO T. Rowe Price
NoLoad Variable Annuity, Attn: Mark Young, 700 SW Harrison
St., Topeka, KS 666360002; United Of Omaha Series V, Attn:
John Martin, Corporate General Ledger, Mutual Of Omaha Plaza,
Omaha, NE 68175; Providian Life & Health Insurance Company,
Attn: Kim Cox, 8th Floor, P.O. Box 32830, Louisville, KY
402322830; American United Life Separate Account II, Attn:
Bill Flory, P.O. Box 195, Indianapolis, IN 462069102;
American United Life, American Individual Unit Trust, Attn:
Bill Flory, P.O. Box 195, Indianapolis, IN 462069102; and
Pruco Life, Flexible Premium Variable Annuity Account, Attn:
Kathy McClunn/SEP Accts/340W, 1111 Durham Avenue, South
Plainfield, NJ 070802305.
International Stock Portfolio:
Century Life of America, Century Variable Annuity Account, c/o
Vicki Foelske, 2000 Heritage Way, Waverly, IA 506779208; The
Prudential Insurance Company of America, Attn: Robert Leung,
71 Hanover Road, Mail Stop 84, Florham Park, NJ 079321502;
SMA Life, 440 Lincoln Street S134, Worcester, MA 01653002;
UNUM Variable Annuity, 2211 Congress Street, M279, Portland,
ME 041220002; Security Benefit Life Insurance Company, FBO T.
Rowe Price NoLoad Variable Annuity, Attn: Mark Young, 700 SW
Harrison Street, Topeka, KS 666360002; Providian Life &
Health Insurance Company, Attn: Kim Cox, 8th Floor, P.O. Box
32830, Louisville, KY 402322830; United Of Omaha Series V,
Attn: John Martin, Corporate General Ledger, Mutual Of Omaha
Plaza, Omaha, NE 68175.
New America Growth Portfolio:
Security Benefit Life Insurance Company, FBO T. Rowe Price
NoLoad Variable Annuity, Attn: Mark Young, 700 SW Harrison
St., Topeka, KS 666360002; Providian Life & Health Insurance
Company, Attn: Kim Cox, 8th Floor, P.O. Box 32830, Louisville,
KY 402322830; United Of Omaha Series V, Attn: John Martin,
Corporate General Ledger, Mutual Of Omaha Plaza, Omaha, NE
68175.
LimitedTerm Bond Portfolio:
Security Benefit Life Insurance Company, FBO T. Rowe Price
NoLoad Variable Annuity, Attn:. Mark Young, 700 SW Harrison
St., Topeka, KS 666360002; United Of Omaha Series V, Attn:
John Martin, Corporate General Ledger, Mutual Of Omaha Plaza,
Omaha, NE 68175.
Personal Strategy Balanced Portfolio:
Security Benefit Life Insurance Company, FBO T. Rowe Price
NoLoad Variable Annuity, Attn: Mark Young, 700 SW Harrison
St., Topeka, KS 666360002; United Of Omaha Series V, Attn:
John Martin, Corporate General Ledger, Mutual Of Omaha Plaza,
Omaha, NE 68175.
MidCap Growth Portfolio:
Security Benefit Life Insurance Company, FBO T. Rowe Price
NoLoad Variable Annuity, Attn: Mark Young, 700 SW Harrison
Street, Topeka, KS 666360002.
Prime Reserve Portfolio:
Security Benefit Life Insurance Company, FBO T. Rowe Price
NoLoad Variable Annuity, Attn: Mark Young, 700 SW Harrison
Street, Topeka, KS 666360002.
Investment
Management
Services
Services (All Funds Except International Stock Portfolio)
Under the Management Agreement, T. Rowe Price provides each
Fund, except the International Stock Portfolio, with
discretionary investment services. Specifically, T. Rowe
Price is responsible for supervising and directing the
investments of each Fund in accordance with the Fund's
investment objectives, program, and restrictions as provided
in its prospectus and this Statement of Additional
Information. T. Rowe Price is also responsible for effecting
all security transactions on behalf of the Fund, including the
negotiation of commissions and the allocation of principal
business and portfolio brokerage. In addition to these
services, T. Rowe Price provides the Fund with certain
corporate administrative services, including: maintaining each
Fund's corporate existence and corporate records; registering
and qualifying Fund shares under federal and state laws;
monitoring the financial, accounting, and administrative
functions of the Fund; maintaining liaison with the agents
employed by the Fund such as the Fund's custodian and transfer
agent; assisting the Fund in the coordination of such agents'
activities; and permitting T. Rowe Price's employees to serve
as officers, directors, and committee members of the Fund
without cost to that Fund.
The Management Agreement also provides that T. Rowe Price, its
directors, officers, employees, and certain other persons
performing specific functions for the Fund will only be liable
to the Fund for losses resulting from willful misfeasance, bad
faith, gross negligence, or reckless disregard of duty.
International Stock Portfolio
Under the Management Agreement for the International Stock
Portfolio, PriceFleming provides the Fund with discretionary
investment services. Specifically, PriceFleming is
responsible for supervising and directing the investments of
the Fund in accordance with the Fund's investment objective,
program, and restrictions as provided in its prospectus and
this Statement of Additional Information. PriceFleming is
also responsible for effecting all security transactions on
behalf of the Fund, including the negotiation of commissions
and the allocation of principal business and portfolio
brokerage. In addition to these services, PriceFleming
provides the Fund with certain corporate administrative
services, including: maintaining the Fund's corporate
existence, corporate records, and registering and qualifying
Fund shares under federal and state laws; monitoring the
financial, accounting, and administrative functions of the
Fund; maintaining liaison with the agents employed by the Fund
such as the Fund's custodian and transfer agent; assisting the
Fund in the coordination of such agents' activities; and
permitting PriceFleming's employees to serve as officers,
directors, and committee members of the Fund without cost to
the Fund.
The Management Agreement also provides that PriceFleming, its
directors, officers, employees, and certain other persons
performing specific functions for the Fund will only be liable
to the Fund for losses resulting from willful misfeasance, bad
faith, gross negligence, or reckless disregard of duty.
Under the Management Agreement, PriceFleming is permitted to
utilize the services or facilities of others to provide it or
the Fund with statistical and other factual information,
advice regarding economic factors and trends, advice as to
occasional transactions in specific securities, and such other
information, advice or assistance as PriceFleming may deem
necessary, appropriate, or convenient for the discharge of its
obligations under the Management Agreement or otherwise
helpful to the Fund.
Certain administrative support is provided by T. Rowe Price
which receives from PriceFleming a fee of 0.15% of the market
value of all assets in equity accounts, 0.15% of the market
value of all assets in active fixed income accounts and 0.035%
of the market value of all assets in passive fixed income
accounts under PriceFleming's management.
PriceFleming has entered into separate letters of agreement
with Fleming Investment Management Limited ("FIM") and Jardine
Fleming Investment Holdings Limited ("JFIH"), wherein FIM and
JFIH have agreed to render investment research and
administrative support to PriceFleming. FIM is a whollyowned
subsidiary of Robert Fleming Asset Management Limited which is
a whollyowned subsidiary of Robert Fleming Holdings Limited
("Robert Fleming Holdings"). JFIH is an indirect whollyowned
subsidiary of Jardine Fleming Group Limited. Under the
letters of agreement, these companies will provide
PriceFleming with research material containing statistical and
other factual information, advice regarding economic factors
and trends, advice on the allocation of investments among
countries and as between debt and equity classes of
securities, and research and occasional advice with respect to
specific companies. For these services, FIM and JFIH each
receives a fee 0.075% of the market value of all assets in
equity accounts under PriceFleming's management. FIM and JFIH
each receive a fee of 0.075% of the market value of all assets
in active fixed income accounts and 0.0175% of such market
value in passive fixed income accounts under PriceFleming's
management.
Robert Fleming personnel have extensive research resources
throughout the world. A strong emphasis is placed on direct
contact with companies in the research universe. Robert
Fleming personnel, who frequently speak the local language,
have access to the full range of research products available
in the market place and are encouraged to produce independent
work dedicated solely to portfolio investment management,
which adds value to that generally available.
Management Fee
Each Fund, pays the Manager an annual allinclusive fee (the
"Fee"). The Fee is paid monthly to the Manager, on the first
business day of the next succeeding calendar month and is the
sum of the daily Fee accruals for each month. The daily Fee
accrual for any particular day is calculated by multiplying
the fraction of one (1) over the number of calendar days in
the year by the appropriate Fee rate and multiplying this
product by the net assets of the Fund for that day as
determined in accordance with the Fund's prospectus as of the
close of business from the previous business day on which the
Fund was open for business.
The Management Agreement between each Fund and the Manager,
provides that the Manager will pay all expenses of each Fund's
operations, except interest, taxes, brokerage commissions and
other charges incident to the purchase, sale or lending of the
Fund's portfolio securities, directors' fee and expenses
(including counsel fees and expenses) and such nonrecurring or
extraordinary expenses that may arise, including the costs of
actions, suits, or proceedings to which the Fund is a party
and the expenses the Fund may incur as a result of its
obligation to provide indemnification to its officers,
directors and agents. However, the Board of Directors of each
Fund reserves the right to impose additional fees against
shareholder accounts to defray expenses which would otherwise
be paid by the Manager under the Management Agreement. The
Board does not anticipate levying such charges; such a fee, if
charged, may be retained by the Fund or paid to the Manager.
The fee for each Fund is listed in the chart below:
____________________________________________________________
__________
Name of Fund Fee
____________________________________________________________
__________
Prime Reserve Portfolio 0.55%
____________________________________________________________
__________
LimitedTerm Bond Portfolio 0.70%
____________________________________________________________
__________
Equity Income Portfolio 0.85%
____________________________________________________________
__________
New America Growth Portfolio 0.85%
____________________________________________________________
__________
MidCap Growth Portfolio 0.85%
____________________________________________________________
__________
Personal Strategy Balanced Portfolio 0.90%
____________________________________________________________
__________
International Stock Portfolio 1.05%
____________________________________________________________
__________
The following chart sets forth the total management fees, if
any, paid to T. Rowe Price (or PriceFleming for the
International Stock Portfolio) for the last three fiscal
years:
____________________________________________________________
__________
Name of Fund 1996 1995 1994
____________________________________________________________
__________
Prime Reserve * * *
____________________________________________________________
__________
LimitedTerm Bond
____________________________________________________________
__________
Equity Income 237,000
____________________________________________________________
__________
Personal Strategy Balanced29,000 *
____________________________________________________________
__________
MidCap Growth * * *
____________________________________________________________
__________
New America Growth 164,000
____________________________________________________________
__________
International Stock 1,378,000 252,000 36,000
____________________________________________________________
__________
*Prior to commencement of operations.
Distributor for Fund
T. Rowe Price Investment Services, Inc. ("Investment
Services"), a Maryland corporation formed in 1980 as a
whollyowned subsidiary of T. Rowe Price, serves as each Fund's
distributor. Investment Services is registered as a
brokerdealer under the Securities Exchange Act of 1934 and is
a member of the National Association of Securities Dealers,
Inc. The offering of each Fund's shares is continuous.
Investment Services is located at the same address as each
Fund and T. Rowe Price 100 East Pratt Street, Baltimore,
Maryland 21202.
Investment Services serves as distributor to each Fund
pursuant to an Underwriting Agreement ("Underwriting
Agreement"). Each Underwriting Agreement provides that
Investment Services will pay all fees and expenses in
connection with: printing and distributing prospectuses and
reports for use in offering and selling Fund shares;
preparing, setting in type, printing, and mailing all sales
literature and advertising; Investment Services' federal and
state registrations as a brokerdealer; and offering and
selling Fund shares, except for those fees and expenses
specifically assumed by the Fund. Investment Services'
expenses are paid by T. Rowe Price.
Investment Services acts as the agent of each Fund in
connection with the sale of its shares in all states in which
the shares are qualified and in which Investment Services is
qualified as a brokerdealer. Under the Underwriting
Agreement, Investment Services accepts orders for Fund shares
at net asset value. No sales charges are paid by investors or
any Fund.
Custodian
State Street Bank and Trust Company is the custodian for each
Fund's domestic securities and cash, but it does not
participate in the Fund's investment decisions. Portfolio
securities purchased in the U.S. are maintained in the custody
of State Street Bank and may be entered into the Federal
Reserve Book Entry System, or the security depository system
of the Depository Trust Corporation. The Funds have also
entered into a Custodian Agreement with The Chase Manhattan
Bank, N.A., London, pursuant to which portfolio securities
which are purchased outside the U.S. are maintained in the
custody of various foreign branches of The Chase Manhattan
Bank and such other custodians, including foreign banks and
foreign securities depositories as are approved by the Fund's
Board of Directors 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
Prime Reserve,LimitedTerm Bond, Equity Income, New America
Growth, MidCap Growth, and Personal Strategy Balanced Funds
Each Fund's investment adviser (T. Rowe Price) has a written
Code of Ethics which requires all employees to obtain prior
clearance before engaging in any personal securities
transactions within three business days of their execution.
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 engaging in shortterm trading
(e.g., purchases and sales involving the same security within
60 days). Any material violation of the Code of Ethics is
reported to the Board of the Fund. The Board also reviews the
administration of the Code of Ethics on an annual basis.
International Stock Portfolio
The Fund's investment adviser (PriceFleming) 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 generally not be permitted to
effect transactions in a security: If there are pending client
orders in the security; the security has been purchased or
sold by a client within seven calendar days; the security is
being considered for purchase for a client; the security is
subject to internal trading restrictions. In addition,
employees are prohibited from engaging in shortterm trading
(e.g., purchases and sales involving the same security within
60 days). Any material violation of the Code of Ethics is
reported to the Board of the Fund. The Board also reviews the
administration of the Code of Ethics on an annual basis.
Portfolio Transactions
(All Funds, except International Stock Portfolio)
Decisions with respect to the purchase and sale of portfolio
securities on behalf of each Fund are made by T. Rowe Price.
T. Rowe Price is also responsible for implementing these
decisions, including the negotiation of commissions and the
allocation of portfolio brokerage and principal business.
Each Fund's purchases and sales of fixed income portfolio
securities are normally done on a principal basis and do not
involve the payment of a commission although they may involve
the designation of selling concessions. That part of the
discussion below relating solely to brokerage commissions
would not normally apply to the Fund's purchase of fixed
income securities.
How Brokers and Dealers Are Selected
(All Funds Except Prime Reserve Portfolio)
Equity Securities. In purchasing and selling each Fund's
portfolio securities, it is T. Rowe Price's policy to obtain
quality execution at the most favorable prices through
responsible brokers and dealers and, in the case of agency
transactions, at competitive commission rates. However, under
certain conditions, the Fund may pay higher brokerage
commissions in return for brokerage and research services. As
a general practice, overthecounter orders are executed with
marketmakers. In selecting among marketmakers, T. Rowe Price
generally seeks to select those it believes to be actively and
effectively trading the security being purchased or sold. In
selecting brokerdealers to execute each Fund's portfolio
transactions, consideration is given to such factors as the
price of the security, the rate of the commission, the size
and difficulty of the order, the reliability, integrity,
financial condition, general execution and operational
capabilities of competing brokers and dealers, and brokerage
and research services provided by them. It is not the policy
of T. Rowe Price to seek the lowest available commission rate
where it is believed that a broker or dealer charging a higher
commission rate would offer greater reliability or provide
better price or execution.
Fixed Income Securities. Fixed income securities are generally
purchased from the issuer or a primary marketmaker 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 marketmakers 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.
In purchasing and selling a 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 (in which a Fund does not
generally engage), at competitive commission rates. However,
under certain conditions, a Fund may pay higher brokerage
commissions in return for brokerage and research services. In
selecting brokerdealers to execute a 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.
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 brokerdealers.
Research services received from brokers and dealers are
supplemental to T. Rowe Price's own research effort and, when
utilized, are subject to internal analysis before being
incorporated by T. Rowe Price into its investment process. As
a practical matter, it would not be possible for T. Rowe
Price's Equity Research Division to generate all of the
information presently provided by brokers and dealers. T.
Rowe Price pays cash for certain research services received
from external sources. T. Rowe Price also allocates brokerage
for research services which are available for cash. While
receipt of research services from brokerage firms has not
reduced T. Rowe Price's normal research activities, the
expenses of T. Rowe Price could be materially increased if it
attempted to generate such additional information through its
own staff. To the extent that research services of value are
provided by brokers or dealers, T. Rowe Price may be relieved
of expenses which it might otherwise bear.
T. Rowe Price has a policy of not allocating brokerage
business in return for products or services other than
brokerage or research services. In accordance with the
provisions of Section 28(e) of the Securities Exchange Act of
1934, T. Rowe Price may from time to time receive services and
products which serve both research and nonresearch functions.
In such event, T. Rowe Price makes a good faith determination
of the anticipated research and nonresearch 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 brokerdealers reflect the value of
their research services, T. Rowe Price would expect to assess
the reasonableness of commissions in light of the total
brokerage and research services provided by each particular
broker. T. Rowe Price may receive research, as defined in
Section 28(e), in connection with selling concessions and
designations in fixed price offerings in which the Funds
participate.
Internal Allocation Procedures
T. Rowe Price has a policy of not precommitting a specific
amount of business to any broker or dealer over any specific
time period. Historically, the majority of brokerage
placement has been determined by the needs of a specific
transaction such as marketmaking, availability of a buyer or
seller of a particular security, or specialized execution
skills. However, T. Rowe Price does have an internal
brokerage allocation procedure for that portion of its
discretionary client brokerage business where special needs do
not exist, or where the business may be allocated among
several brokers or dealers which are able to meet the needs of
the transaction.
Each year, T. Rowe Price assesses the contribution of the
brokerage and research services provided by brokers or
dealers, and attempts to allocate a portion of its brokerage
business in response to these assessments. Research analysts,
counselors, various investment committees, and the Trading
Department each seek to evaluate the brokerage and research
services they receive from brokers or dealers and make
judgments as to the level of business which would recognize
such services. In addition, brokers or dealers sometimes
suggest a level of business they would like to receive in
return for the various brokerage and research services they
provide. Actual brokerage received by any firm may be less
than the suggested allocations but can, and often does, exceed
the suggestions, because the total business is allocated on
the basis of all the considerations described above. In no
case is a broker or dealer excluded from receiving business
from T. Rowe Price because it has not been identified as
providing research services.
Miscellaneous
T. Rowe Price's brokerage allocation policy is consistently
applied to all its fully discretionary accounts, which
represent a substantial majority of all assets under
management. Research services furnished by brokers or dealers
through which T. Rowe Price effects securities transactions
may be used in servicing all accounts (including nonFund
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 brokerdealer on the
basis of its sales of the Fund's shares. However, this does
not mean that brokerdealers who purchase Fund shares for their
clients will not receive business from the Fund.
Some of T. Rowe Price's other clients have investment
objectives and programs similar to those of the Funds. T.
Rowe Price may occasionally make recommendations to other
clients which result in their purchasing or selling securities
simultaneously with the Fund. As a result, the demand for
securities being purchased or the supply of securities being
sold may increase, and this could have an adverse effect on
the price of those securities. It is T. Rowe Price's policy
not to favor one client over another in making recommendations
or in placing orders. T. Rowe Price frequently follows the
practice of grouping orders of various clients for execution
which generally results in lower commission rates being
attained. In certain cases, where the aggregate order is
executed in a series of transactions at various prices on a
given day, each participating client's proportionate share of
such order reflects the average price paid or received with
respect to the total order. T. Rowe Price has established a
general investment policy that it will ordinarily not make
additional purchases of a common stock of a company for its
clients (including the T. Rowe Price Funds) if, as a result of
such purchases, 10% or more of the outstanding common stock of
such company would be held by its clients in the aggregate.
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
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., each Fund's
distributor. At the present time, T. Rowe Price does not
recapture commissions or underwriting discounts or selling
group concessions in connection with taxable securities
acquired in underwritten offerings. T. Rowe Price does,
however, attempt to negotiate elimination of all or a portion
of the sellinggroup concession or underwriting discount when
purchasing taxexempt municipal securities on behalf of its
clients in underwritten offerings.
Transactions With Related Brokers and Dealers
As provided in the Investment Management Agreement between
each Fund and T. Rowe Price, T. Rowe Price is responsible not
only for making decisions with respect to the purchase and
sale of the Fund's portfolio securities, but also for
implementing these decisions, including the negotiation of
commissions and the allocation of portfolio brokerage and
principal business. It is expected that T. Rowe Price may
place orders for the Fund's portfolio transactions with
brokerdealers 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 whollyowned subsidiary, owns 25%
of the common stock of Rowe PriceFleming 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 whollyowned
subsidiary of T. Rowe Price, and the remaining 25% is owned by
Jardine Fleming Holdings Limited, a subsidiary of JFG. JFG is
50% owned by Robert Fleming Holdings and 50% owned by Jardine
Matheson Holdings Limited. Orders for the Fund's portfolio
transactions placed with affiliates of Robert Fleming Holdings
and JFG will result in commissions being received by such
affiliates.
The Board of Directors of each Fund has authorized T. Rowe
Price to utilize certain affiliates of Robert Fleming and JFG
in the capacity of broker in connection with the execution of
the Fund's portfolio transactions. These affiliates include,
but are not limited to, Jardine Fleming Securities Limited
("JFS"), a whollyowned 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 17e1 under that Act will be followed when
using such brokers.
Portfolio Transactions
(International Stock Portfolio)
Investment or Brokerage Discretion
Decisions with respect to the purchase and sale of portfolio
securities on behalf of the Fund are made by PriceFleming.
PriceFleming is also responsible for implementing these
decisions, including the allocation of portfolio brokerage and
principal business and the negotiation of commissions.
How Brokers and Dealers Are Selected
Equity Securities. In purchasing and selling the Fund's
portfolio securities, it is PriceFleming's policy to obtain
quality execution at the most favorable prices through
responsible brokerdealers and, in the case of agency
transactions, at competitive commission rates where such rates
are negotiable. However, under certain conditions, the Fund
may pay higher brokerage commissions in return for brokerage
and research services. In selecting brokerdealers to execute
the Fund's portfolio transactions, consideration is given to
such factors as the price of the security, the rate of the
commission, the size and difficulty of the order, the
reliability, integrity, financial condition, general execution
and operational capabilities of competing brokers and dealers,
their expertise in particular markets and the brokerage and
research services they provide to PriceFleming or the Fund.
It is not the policy of PriceFleming to seek the lowest
available commission rate where it is believed that a broker
or dealer charging a higher commission rate would offer
greater reliability or provide better price or execution.
Transactions on stock exchanges involve the payment of
brokerage commissions. In transactions on stock exchanges in
the United States, these commissions are negotiated.
Traditionally, commission rates have generally not been
negotiated on stock markets outside the United States. In
recent years, however, an increasing number of overseas stock
markets have adopted a system of negotiated rates, although a
number of markets continue to be subject to an established
schedule of minimum commission rates. It is expected that
equity securities will ordinarily be purchased in the primary
markets, whether overthecounter or listed, and that listed
securities may be purchased in the overthecounter market if
such market is deemed the primary market. In the case of
securities traded on the overthecounter markets, there is
generally no stated commission, but the price usually includes
an undisclosed commission or markup. In underwritten
offerings, the price includes a disclosed, fixed commission or
discount.
Fixed Income Securities. For fixed income securities, it is
expected that purchases and sales will ordinarily be
transacted with the issuer, the issuer's underwriter, or with
a primary market maker acting as principal on a net basis,
with no brokerage commission being paid by the Fund. However,
the price of the securities generally includes compensation
which is not disclosed separately. Transactions placed though
dealers who are serving as primary market makers reflect the
spread between the bid and asked prices.
With respect to equity and fixed income securities,
PriceFleming may effect principal transactions on behalf of
the Fund with a broker or dealer who furnishes brokerage
and/or research services, designate any such broker or dealer
to receive selling concessions, discounts or other allowances
or otherwise deal with any such broker or dealer in connection
with the acquisition of securities in underwritings. The
prices the Fund pays to underwriters of newlyissued securities
usually include a concession paid by the issuer to the
underwriter. PriceFleming may receive research services in
connection with brokerage transactions, including designations
in fixed price offerings.
PriceFleming may cause the Fund to pay a brokerdealer who
furnishes brokerage and/or research services a commission for
executing a transaction that is in excess of the commission
another brokerdealer would have received for executing the
transaction if it is determined that such commission is
reasonable in relation to the value of the brokerage and/or
research services which have been provided. In some cases,
research services are generated by third parties but are
provided to PriceFleming by or through brokerdealers.
Descriptions of Research Services Received From Brokers and
Dealers
PriceFleming receives a wide range of research services from
brokers and dealers covering investment opportunities
throughout the world, including information on the economies,
industries, groups of securities, individual companies,
statistics, political developments, technical market action,
pricing and appraisal services, and performance analyses of
all the countries in which the Fund's portfolio is likely to
be invested. PriceFleming cannot readily determine the extent
to which commissions charged by brokers reflect the value of
their research services, but brokers occasionally suggest a
level of business they would like to receive in return for the
brokerage and research services they provide. To the extent
that research services of value are provided by brokers,
PriceFleming may be relieved of expenses which it might
otherwise bear. In some cases, research services are
generated by third parties but are provided to PriceFleming by
or through brokers.
Commissions to Brokers Who Furnish Research Services
Certain brokerdealers which provide quality execution services
also furnish research services to PriceFleming. PriceFleming
has adopted a brokerage allocation policy embodying the
concepts of Section 28(e) of the Securities Exchange Act of
1934, which permits an investment adviser to cause its clients
to pay a broker which furnishes brokerage or research services
a higher commission than that which might be charged by
another broker which does not furnish brokerage or research
services, or which furnishes brokerage or research services
deemed to be of lesser value, if such commission is deemed
reasonable in relation to the brokerage and research services
provided by the broker, viewed in terms of either that
particular transaction or the overall responsibilities of the
adviser with respect to the accounts as to which it exercises
investment discretion. Accordingly, PriceFleming may assess
the reasonableness of commissions in light of the total
brokerage and research services provided by each particular
broker.
Miscellaneous
Research services furnished by brokers through which
PriceFleming effects securities transactions may be used in
servicing all accounts managed by PriceFleming. Conversely,
research services received from brokers which execute
transactions for a particular Fund will not necessarily be
used by PriceFleming exclusively in connection with the
management of that Fund.
Some of PriceFleming's other clients have investment
objectives and programs similar to those of the Fund.
PriceFleming 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 PriceFleming's policy
not to favor one client over another in making recommendations
or in placing orders. PriceFleming 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. PriceFleming has established a
general investment policy that it will ordinarily not make
additional purchases of a common stock of a company for its
clients (including the T. Rowe Price Funds) if, as a result of
such purchases, 10% or more of the outstanding common stock of
such company would be held by its clients in the aggregate.
The Fund does not allocate business to any brokerdealer on the
basis of its sales of the Fund's shares. However, this does
not mean that brokerdealers who purchase Fund shares for their
clients will not receive business from the Fund.
Transactions With Related Brokers and Dealers
As provided in the Investment Management Agreement between the
Fund and the Investment Adviser (T. Rowe Price or PriceFleming
for the International Stock Portfolio, herein after referred
to as the "Adviser"), the Adviser 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 the Adviser may place orders for the Fund's
portfolio transactions with brokerdealers through the same
trading desk the Adviser 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 whollyowned
subsidiary, owns 25% of the common stock of Rowe PriceFleming
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
whollyowned 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 the Adviser
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. 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 of the Fund has agreed that the
procedures set forth in Rule 17e1 under that Act will be
followed when using such brokers.
The abovereferenced authorization was made in accordance with
Section 17(e) of the Investment Company Act of 1940 (the "1940
Act") and Rule 17e1 thereunder which require the Funds'
independent directors to approve the procedures under which
brokerage allocation to affiliates is to be made and to
monitor such allocations on a continuing basis. Except with
respect to tender offers, it is not expected that any portion
of the commissions, fees, brokerage, or similar payments
received by the affiliates of Robert Fleming in such
transactions will be recaptured by the Funds. The directors
have reviewed and from time to time may continue to review
whether other recapture opportunities are legally permissible
and available and, if they appear to be, determine whether it
would be advisable for the Fund to seek to take advantage of
them.
International Stock Portfolio
The following amounts and percentages were paid to JFS during
the last three fiscal years:
____________________________________________________________
__________
Total Aggregate Aggregate
Brokerage Brokerage Dollar
Year Commissions Commissions Amount
____________________________________________________________
__________
1996 $6,154 1.44% 1.05%
____________________________________________________________
__________
1995 3,071 14.84 2.32
____________________________________________________________
__________
1994 479 2.34 2.06
____________________________________________________________
__________
The following amounts and percentages were paid to RF&Co
during the last three fiscal years:
____________________________________________________________
__________
Total Aggregate Aggregate
Brokerage Brokerage Dollar
Year CommissionsCommissions Amount
____________________________________________________________
__________
1996 $853 0.20% 0.19%
____________________________________________________________
__________
1995 1,231 4.89 0.36
____________________________________________________________
__________
1994 38 0.19 0.45
____________________________________________________________
__________
The following amounts and percentages were paid to Ord Minnett
during the last three fiscal years:
____________________________________________________________
__________
Total Aggregate Aggregate
Brokerage Brokerage Dollar
Year CommissionsCommissions Amount
____________________________________________________________
__________
1996 $6,970 1.61% 2.42%
____________________________________________________________
__________
1995 1,038 5.81 0.41
____________________________________________________________
__________
1994 756 3.70 3.84
____________________________________________________________
__________
Other
For the fiscal periods ended December 31, 1996, 1995, and
1994, the total brokerage commissions paid by each Fund,
including the discounts received by securities dealers in
connection with underwritings, and the percentage of these
commissions paid to firms which provided research,
statistical, or other services to T. Rowe Price in connection
with the management of each Fund, or, in some cases, to each
Fund, is shown below.
____________________________________________________________
__________
1996 1995 1994
Fund Commissions %Commissions %Commissions %
____________________________________________________________
__________
Prime
Reserve * * * * * *
____________________________________________________________
__________
Limited
Term Bond**$161,827,00076.0%$52,308,00077.0%$17,730,00079.0%
____________________________________________________________
__________
Equity
Income 86,00025.3% 10,00013.7% 4,700
____________________________________________________________
__________
Personal
Strategy
Balanced 52,00030.8% 7,200 6.2% * *
____________________________________________________________
__________
MidCap
Growth * * * * * *
____________________________________________________________
__________
New America
Growth 142,00030.7% 45,00019.9% 15,70022.2%
____________________________________________________________
__________
International
Stock 432,04397.0% 107,75694.0% 20,40094.0%
____________________________________________________________
__________
* Prior to commencement of operations.
**For the LimitedTerm Bond Portfolio, the entire amounts
listed above, represented principal transactions as to which
the Fund had no knowledge of the profits or losses realized by
the respective brokerdealers for the fiscal periods listed.
The portfolio turnover rates of the Fund were as follows:
____________________________________________________________
__________
1996 1995 1994
____________________________________________________________
__________
Prime Reserve * * *
____________________________________________________________
__________
LimitedTerm Bond 97.7% 73.7% 146.0%**
____________________________________________________________
__________
Equity Income 17.4% 10.1% 21.3%**
____________________________________________________________
__________
MidCap Growth * * *
____________________________________________________________
__________
New America Growth 27.2% 54.5% 81.0%**
____________________________________________________________
__________
International Stock 9.7% 17.4% 4.6%**
____________________________________________________________
__________
Personal Strategy Balanced 51.7% 39.3% *
____________________________________________________________
__________
* Prior to commencement of operations.
** Annualized.
Pricing of Securities
Equity securities listed or regularly traded on a securities
exchange are valued at the last quoted sales price at the time
the valuations are made. A security which is listed or traded
on more than one exchange is valued at the quotation on the
exchange determined to be the primary market for such
security. Listed securities that are not traded on a
particular day and securities regularly traded in the
overthecounter 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 overthecounter
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. Shortterm
debt securities are valued at their amortized cost which, when
combined with accrued interest, approximates fair value.
For the purposes of determining the Fund's net asset value per
share, all assets and liabilities initially expressed in
foreign currencies are converted into U.S. dollars at the mean
of the bid and offer prices of such currencies against U.S.
dollars quoted by any major bank.
Prime Reserve securities are valued at amortized cost.
Assets and liabilities for which the above valuation
procedures are inappropriate or are deemed not to reflect fair
value are stated at fair value, as determined in good faith by
or under the supervision of officers of the Funds, as
authorized by the Board of Directors.
Trading in the portfolio securities of the International Stock
Portfolio may take place in various foreign markets on certain
days (such as Saturday) when the Fund is not open for business
and does not calculate its net asset value. In addition,
trading in the Fund's portfolio securities may not occur on
days when the Fund is open. The calculation of the Fund's net
asset value normally will not take place contemporaneously
with the determination of the value of the Fund's portfolio
securities. Events affecting the values of portfolio
securities that occur between the time their prices are
determined and the time the Fund's net asset value is
calculated will not be reflected in the Fund's net asset value
unless PriceFleming, under the supervision of the Fund's Board
of Directors, determines that the particular event should be
taken into account in computing the Fund's net asset value.
Net Asset Value
Per Share
The purchase and redemption price of the Fund's shares is
equal to the Fund's net asset value per share or share price.
The Fund determines its net asset value per share by
subtracting the Fund's liabilities (including accrued expenses
and dividends payable) from its total assets (the market value
of the securities the Fund holds plus cash and other assets,
including income accrued but not yet received) and dividing
the result by the total number of shares outstanding. The net
asset value per share of the Fund is normally calculated as of
the close of trading on the New York Stock Exchange ("NYSE")
every day the NYSE is open for trading. The NYSE is closed on
the following days: New Year's Day, Washington's Birthday,
Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, and Christmas Day.
Determination of net asset value (and the offering, sale
redemption and repurchase of shares) for the Fund may be
suspended at times (a) during which the NYSE is closed, other
than customary weekend and holiday closings, (b) during which
trading on the NYSE is restricted, (c) during which an
emergency exists as a result of which disposal by the Fund of
securities owned by it is not reasonably practicable or it is
not reasonably practicable for the Fund fairly to determine
the value of its net assets, or (d) during which a
governmental body having jurisdiction over the Fund may by
order permit such a suspension for the protection of the
Fund's shareholders; provided that applicable rules and
regulations of the Securities and Exchange Commission (or any
succeeding governmental authority) shall govern as to whether
the conditions prescribed in (b), (c), or (d) exist.
Maintenance of Net Asset Value Per Share (Prime Reserve
Portfolio)
It is the policy of the Fund to attempt to maintain a net
asset value of $1.00 per share by using the amortized cost
method of valuation as permitted by Rule 2a7 under the
Investment Company Act of 1940. Under this method, securities
are valued by reference to the Fund's acquisition cost as
adjusted for amortization of premium or accumulation of
discount rather than by reference to their market value.
Under Rule 2a7:
(a) The Board of Directors must establish written procedures
reasonably designed, taking into account current market
conditions and the Fund's investment objectives, to
stabilize the Fund's net asset value per share, as
computed for the purpose of distribution, redemption and
repurchase, at a single value;
(b) the Fund must (i) maintain a dollarweighted average
portfolio maturity appropriate to its objective of
maintaining a stable price per share, (ii) not purchase
any instrument with a remaining maturity greater than 397
days, and (iii) maintain a dollarweighted average
portfolio maturity of 90 days or less;
(c) the Fund must limit its purchase of portfolio
instruments, including repurchase agreements, to those
U.S. dollardenominated instruments which the Fund's Board
of Directors determines present minimal credit risks, and
which are eligible securities as defined by Rule 2a7; and
(d) the Board of Directors must determine that (i) it is in
the best interest of the Fund and its shareholders to
maintain a stable net asset value per share under the
amortized cost method; and (ii) the Fund will continue to
use the amortized cost method only so long as the Board
of Directors believes that it fairly reflects the Fund's
market based net asset value per share.
Although the Fund believes that it will be able to maintain
its net asset value at $1.00 per share under most conditions,
there can be no absolute assurance that it will be able to do
so on a continuous basis. If the Fund's net asset value per
share declined, or was expected to decline, below $1.00
(rounded to the nearest one cent), the Board of Directors of
the Fund might temporarily reduce or suspend dividend payments
in an effort to maintain the net asset value at $1.00 per
share. As a result of such reduction or suspension of
dividends, an investor would receive less income during a
given period than if such a reduction or suspension had not
taken place. Such action could result in an investor
receiving no dividend for the period during which he holds his
shares and in his receiving, upon redemption, a price per
share lower than that which he paid. On the other hand, if
the Fund's net asset value per share were to increase, or were
anticipated to increase above $1.00 (rounded to the nearest
one cent), the Board of Directors of the Fund might supplement
dividends in an effort to maintain the net asset value at
$1.00 per share.
Prime Money Market Securities Defined
Prime money market securities are those which are described as
First Tier Securities under Rule 2a7 of the Investment Company
Act of 1940. These include any security with a remaining
maturity of 397 days or less that is rated (or that has been
issued by an issuer that is rated with respect to a class of
shortterm debt obligations, or any security within that class
that is comparable in priority and security with the security)
by any two nationally recognized statistical rating
organizations (NRSROs) (or if only one NRSRO has issued a
rating, that NRSRO) in the highest rating category for
shortterm debt obligations (within which there may be
subcategories). First Tier Securities also include unrated
securities comparable in quality to rated securities, as
determined by T. Rowe Price under the supervision of the
Fund's Board of Directors.
Dividends and
Distributions
Unless the insurance company separate account elects
otherwise, the fourth quarter dividend and capital gain
distribution, if any, will be reinvested on the reinvestment
date using the NAV per share of that date. The reinvestment
date normally precedes the payment date by about 10 days
although the exact timing is subject to change.
Tax Status
Each Fund intends to qualify as a "regulated investment
company" under Subchapter M of the Internal Revenue Code of
1986, as amended ("Code") and also intends to diversify its
assets in accordance with regulations under Code Section
817(h).
In 1987, the Treasury Department indicated that it may issue
regulations addressing the circumstances in which a
policyholder's control of the investments of the insurance
company separate account would result in the policyholder
being treated as the owner of such assets. Although there is
no present indication that such regulations will be issued,
their adoption could alter the tax treatment of the
policyholder, separate account or insurance company.
For tax purposes, the Fund must declare dividends equal to at
least 98% of ordinary income (as of December 31) and capital
gains (as of October 31) in order to avoid a federal excise
tax and distribute 100% of ordinary income and capital gains
as of December 31 to avoid a federal income tax. In certain
circumstances, the Fund may not be required to comply with the
excise tax distribution requirements. It does not make any
difference whether dividends and capital gain distributions
are paid in cash or in additional shares.
At the time a shareholder acquires Fund shares, the Fund's net
asset value may reflect undistributed income, capital gains or
net unrealized appreciation of securities held by the Fund
which may be subsequently distributed as either dividends or
capital gain distributions.
If, in any taxable year, the Fund should not qualify as a
regulated investment company under the Code: (i) the Fund
would be taxed at normal corporate rates on the entire amount
of its taxable income, if any, without deduction for dividends
or other distributions to shareholders; and (ii) the Fund's
distributions to the extent made out of the Fund's current or
accumulated earnings and profits would be treated as ordinary
dividends by shareholders (regardless of whether they would
otherwise have been considered capital gain dividends), and
(iii) the separate accounts investing in the Fund may fail to
satisfy the requirements of Code Section 817(h) which in turn
could adversely affect the tax status of life insurance and
annuity contracts with premiums invested in the affected
separate accounts.
To the extent any Fund invests in foreign securities, the
following would apply:
Passive Foreign Investment Companies
The Fund may purchase the securities of certain foreign
investment funds or trusts called passive foreign investment
companies. In addition to bearing their proportionate share
of a fund's expenses (management fees and operating expenses)
shareholders will also indirectly bear similar expenses of
such funds. Capital gains on the sale of such holdings will
be deemed to be ordinary income regardless of how long the
Fund holds its investment. In addition, the Fund may be
subject to corporate income tax and an interest charge on
certain dividends and capital gains earned from these
investments, regardless of whether such income and gains are
distributed to shareholders.
In accordance with tax regulations, the Fund intends to treat
these securities as sold on the last day of the Fund's fiscal
year and recognize any gains for tax purposes at that time;
losses will not be recognized. Such gains will be considered
ordinary income which the Fund will be required to distribute
even though it has not sold the security and received cash to
pay such distributions.
Foreign Currency Gains and Losses
Foreign currency gains and losses, including the portion of
gain or loss on the sale of debt securities attributable to
foreign exchange rate fluctuations, are taxable as ordinary
income. If the net effect of these transactions is a gain,
the dividend paid by the Fund will be increased; if the result
is a loss, the income dividend paid by the Fund will be
decreased. Adjustments to reflect these gains and losses will
be made at the end of the Fund's taxable year.
Capital Stock
Each Fund's Charter authorizes the Board of Directors to
classify and reclassify any and all shares which are then
unissued, including unissued shares of capital stock into any
number of classes or series, each class or series consisting
of such number of shares and having such designations, such
powers, preferences, rights, qualifications, limitations, and
restrictions, as shall be determined by the Board subject to
the Investment Company Act and other applicable law. The
shares of any such additional classes or series might
therefore differ from the shares of the present class and
series of capital stock and from each other as to preferences,
conversions or other rights, voting powers, restrictions,
limitations as to dividends, qualifications or terms or
conditions of redemption, subject to applicable law, and might
thus be superior or inferior to the capital stock or to other
classes or series in various characteristics. Each
Corporation's Board of Directors may increase or decrease the
aggregate number of shares of stock or the number of shares of
stock of any class or series that each Fund has authorized to
issue without shareholder approval.
Except to the extent that the Fund's Board of Directors might
provide by resolution that holders of shares of a particular
class are entitled to vote as a class on specified matters
presented for a vote of the holders of all shares entitled to
vote on such matters, there would be no right of class vote
unless and to the extent that such a right might be construed
to exist under Maryland law. The Charter contains no
provision entitling the holders of the present class of
capital stock to a vote as a class on any matter. Accordingly,
the preferences, rights, and other characteristics attaching
to any class of shares, including the present class of capital
stock, might be altered or eliminated, or the class might be
combined with another class or classes, by action approved by
the vote of the holders of a majority of all the shares of all
classes entitled to be voted on the proposal, without any
additional right to vote as a class by the holders of the
capital stock or of another affected class or classes.
The various insurance companies own the outstanding shares of
each Fund in their separate accounts. These separate accounts
are registered as investment companies under the 1940 Act or
are excluded from registration. Each insurance company, as
the Shareholder, is entitled to one vote for each full share
held (and fractional votes for fractional shares held). Under
the current laws the insurance companies must vote the shares
held in registered separate accounts in accordance with voting
instructions received from variable Contract Holders or
Participants. Fund shares for which Contract Holders or
Participants are entitled to give voting instructions, but as
to which no voting instructions are received, and shares owned
by the insurance companies or affiliated companies in the
separate accounts, will be voted in proportion to the shares
for which voting instructions have been received.
There will normally be no meetings of shareholders for the
purpose of electing directors unless and until such time as
less than a majority of the directors holding office have been
elected by shareholders, at which time the directors then in
office will call a shareholders' meeting for the election of
directors. Except as set forth above, the directors shall
continue to hold office and may appoint successor directors.
Voting rights are not cumulative, so that the holders of more
than 50% of the shares voting in the election of directors
can, if they choose to do so, elect all the directors of the
Fund, in which event the holders of the remaining shares will
be unable to elect any person as a director. As set forth in
the ByLaws of the Fund, a special meeting of shareholders of
the Fund shall be called by the Secretary of the Fund on the
written request of shareholders entitled to cast at least 10%
of all the votes of the Fund entitled to be cast at such
meeting. Shareholders requesting such a meeting must pay to
the Fund the reasonably estimated costs of preparing and
mailing the notice of the meeting. The Fund, however, will
otherwise assist the shareholders seeking to hold the special
meeting in communicating to the other shareholders of that
Fund to the extent required by Section 16(c) of the Investment
Company Act of 1940.
Federal Registration
of Shares
Each Fund's shares are registered for sale under the
Securities Act of 1933. Registration of the Fund's shares is
not required under any state law, but the Fund is required to
make certain filings with and pay fees to the states in order
to sell shares in the states.
Legal Counsel
Shereff, Friedman, Hoffman, & Goodman, LLP, whose address is
919 Third Avenue, New York, New York 10022, is legal counsel
to the Fund.
Independent
Accountants
Price Waterhouse LLP, whose address is Gateway International
II, 1306 Concourse Drive, Suite 100, Linthicum, MD 210901020
are the independent accountants to each Fund.
The financial statements of the Fund for the year ended
December 31, 1996, and the report of independent accountants
are included in the Fund's Annual Report. A copy of the
Annual Report accompanies this Statement of Additional
Information. The following financial statements and the
report of independent accountants appearing in the Annual
Report for the year ended December 31, 1996, are incorporated
into this Statement of Additional Information by reference:
International Stock Portfolio Page
_____
Report of Independent Accountants. . . . . . 18
Financial Highlights . . . . . . . . . . . . 5
Statement of Net Assets, December 31, 1996 . 613
Statement of Operations, December 31, 1996 . 14
Statement of Changes in Net Assets,Years
Ended December 31, 1996 and 1995. . . . 15
Notes to Financial Statements, December 31, 1996 1617
Equity Income Portfolio Page
____
Report of Independent Accountants. . . . . . 13
Financial Highlights . . . . . . . . . . . . 4
Statement of Net Assets, December 31, 1996 . 58
Statement of Operations, December 31, 1996 . 9
Statement of Changes in Net Assets,Years
Ended December 31, 1996 and 1995 . . . . 10
Notes to Financial Statements,
December 31, 1996. . . . . . . . . . . . 1112
New America Growth Portfolio Page
____
Report of Independent Accountants. . . . . . 10
Financial Highlights . . . . . . . . . . . . 4
Statement of Net Assets, December 31, 1996 . 56
Statement of Operations, December 31, 1996 . 7
Statement of Changes in Net Assets,Years Ended
December 31, 1996 and 1995 . . . . . . . 8
Notes to Financial Statements,
December 31, 1996. . . . . . . . . . . . 9
LimitedTerm Bond Portfolio Page
____
Report of Independent Accountants. . . . . . 13
Financial Highlights . . . . . . . . . . . . 4
Statement of Net Assets, December 31, 1996 . 58
Statement of Operations, December 31, 1996 . 9
Statement of Changes in Net Assets,Years Ended
December 31, 1996 and 1995 . . . . . . . 10
Notes to Financial Statements, December 31, 1996 1112
Personal Strategy Balanced Portfolio Page
____
Report of Independent Accountants. . . . . . 19
Financial Highlights . . . . . . . . . . . . 4
Statement of Net Assets, December 31, 1996 . 514
Statement of Operations, December 31, 1996 . 15
Statement of Changes in Net Assets,Year Ended
December 31, 1995,
and From December 30, 1994 (Commencement
of Operations to
December 31, 1995. . . . . . . . . . . . 16
Notes to Financial Statements,
December 31, 1996. . . . . . . . . . . . 1718
Ratings of
Commercial Paper
Moody's Investors Service, Inc.: The rating of Prime1 is the
highest commercial paper rating assigned by Moody's. Among
the factors considered by Moody's in assigning ratings are the
following: valuation of the management of the issuer;
economic evaluation of the issuer's industry or industries and
an appraisal of speculativetype risks which may be inherent in
certain areas; evaluation of the issuer's products in relation
to competition and customer acceptance; liquidity; amount and
quality of longterm debt; trend of earnings over a period of
10 years; financial strength of the parent company and the
relationships which exist with the issuer; and recognition by
the management of obligations which may be present or may
arise as a result of public interest questions and
preparations to meet such obligations. These factors are all
considered in determining whether the commercial paper is
rated P1, P2, or P3.
Standard & Poor's Corporation: Commercial paper rated A
(highest quality) by S&P has the following characteristics:
liquidity ratios are adequate to meet cash requirements;
longterm senior debt is rated "A" or better, although in some
cases "BBB" credits may be allowed. The issuer has access to
at least two additional channels of borrowing. Basic earnings
and cash flow have an upward trend with allowance made for
unusual circumstances. Typically, the issuer's industry is
well established and the issuer has a strong position within
the industry. The reliability and quality of management are
unquestioned. The relative strength or weakness of the above
factors determines whether the issuer's commercial paper is
rated A1, A2, or A3.
Fitch Investors Service, Inc.: Fitch 1 Highest grade.
Commercial paper assigned this rating is regarded as having
the strongest degree of assurance for timely payment.
Fitch 2 Very good grade. Issues assigned this rating reflect
an assurance of timely payment only slightly less in degree
than the strongest issues.
Ratings of Corporate
Debt Securities
Moody's Investors Services, Inc. (Moody's)
Aaa Bonds rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are
generally referred to as "gilt edge."
Aa Bonds rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds.
A Bonds rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations.
Baa Bonds rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor
poorly secured. Interest payments and principal security
appear adequate for the present but certain protective
elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba Bonds rated Ba are judged to have speculative elements:
their futures cannot be considered as well assured. Often the
protection of interest and principal payments may be very
moderate and thereby not well safeguarded during both good and
bad times over the future. Uncertainty of position
characterize bonds in this class.
B Bonds rated B generally lack the characteristics of a
desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over
any long period of time may be small.
Caa Bonds rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with
respect to principal or interest.
Ca Bonds rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have
other marked shortcomings.
C Bonds rated C represent the lowestrated, and have extremely
poor prospects of attaining investment standing.
Standard & Poor's Corporation (S&P)
AAA This is the highest rating assigned by Standard & Poor's
to a debt obligation and indicates an extremely strong
capacity to pay principal and interest.
AA Bonds rated AA also qualify as highquality debt
obligations. Capacity to pay principal and interest is very
strong.
A Bonds rated A have a strong capacity to pay principal and
interest, although they are somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions.
BBB Bonds rated BBB are regarded as having an adequate
capacity to pay principal and interest. Whereas they normally
exhibit adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead
to a weakened capacity to pay principal and interest for bonds
in this category than for bonds in the A category.
BB, C, CCC, CC Bonds rated BB, B, CCC, and CC are regarded on
balance, as predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal. BB
indicates the lowest degree of speculation and CC the highest
degree of speculation. While such bonds will likely have some
quality and protective characteristics, these are outweighed
by large uncertainties or major risk exposures to adverse
conditions.
D Bonds rated D are in default.
Fitch Investors Service, Inc.
AAA High grade, broadly marketable, suitable for investment
by trustees and fiduciary institutions, and liable to but
slight market fluctuation other than through changes in the
money rate. The prime feature of a "AAA" bond is the showing
of earnings several times or many times interest requirements
for such stability of applicable interest that safety is
beyond reasonable question whenever changes occur in
conditions. Other features may enter, such as a wide margin
of protection through collateral, security or direct lien on
specific property. Sinking funds or voluntary reduction of
debt by call or purchase or often factors, while guarantee or
assumption by parties other than the original debtor may
influence their rating.
AA Of safety virtually beyond question and readily salable.
Their merits are not greatly unlike those of "AAA" class but
a bond so rated may be junior though of strong lien, or the
margin of safety is less strikingly broad. The issue may be
the obligation of a small company, strongly secured, but
influenced as to rating by the lesser financial power of the
enterprise and more local type of market.
A Bonds rated A are considered to be investment grade and of
high credit quality. The obligor's ability to pay interest
and repay principal is considered to be strong, but may be
more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB Bonds rated BBB are considered to be investment grade and
of satisfactory credit quality. The obligor's ability to pay
interest and repay principal is considered to be adequate.
Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these
bonds, and therefore impair timely payment. The likelihood
that the ratings of these bonds will fall below investment
grade is higher than for bonds with higher ratings.
BB, B, CCC, CC, and C are regarded on balance as predominantly
speculative with respect to the issuer's capacity to repay
interest and repay principal in accordance with the terms of
the obligation for bond issues not in default. BB indicates
the lowest degree of speculation and C the highest degree of
speculation. The rating takes into consideration special
features of the issue, its relationship to other obligations
of the issuer, and the current and prospective financial
condition and operating performance of the issuer.
T. Rowe Price
Variable Annuity Service Center
P.O. Box 750440
Topeka, Kansas 666750440
TRP610 (5/97) K15049 5/1/97
