PAGE 1 Registration Nos. 811-07153
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 / X /
Pre-Effective Amendment No. ___ / /
Post-Effective Amendment No. ___ / /
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 / X /
Amendment No. ___ / /
T. ROWE PRICE FIXED INCOME SERIES, INC.
__________________________________
(Exact Name of Registrant as Specified in Charter)
100 East Pratt Street, Baltimore, Maryland 21202
__________________________________________ _________
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code 410-547-2000
____________
Henry H. Hopkins
100 East Pratt Street
Baltimore, Maryland 21202
__________________________________________
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering May 15, 1994
____________
It is proposed that this filing will become effective (check appropriate box):
/ / immediately upon filing pursuant to paragraph (b)
/ / on (date) pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)
/ / on (date) pursuant to paragraph (a) of Rule 485
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933+
______________________________________________________________________________
Proposed Proposed
Maximum Maximum
Amount Offering Aggregate
Title of Securities Being Price Offering Amount of
Being Registered Registered Per Unit Price Registration Fee
______________________________________________________________________________
Capital Stock - $.0001 Indefinite Varying prices calculated $500
par value per share Number as set forth in prospectus
______________________________________________________________________________
The purpose of this Registration Statement is to register the Registrant under
the Investment Company Act of 1940, to register the shares of the Registrant
under the Securities Act of 1933 and to declare pursuant to Section 24(f) of
the Investment Company Act of 1940 and Rule 24f-2 thereunder that an
PAGE 2
indefinite number of its securities is being registered by this Registration
Statement.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states the Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a) may
determine.
SUBJECT TO COMPLETION
Information contained herein is subject to completion or amendment. A
Registration Statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the Registration Statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
any such state.
<PAGE>
PAGE 3
CROSS REFERENCE SHEET
N-1A Item No. Location
_____________ ________
PART A
Item 1. Cover Page Cover Page
Item 2. Synopsis Summary of Fund Fees and
Expenses
Item 3. Condensed Financial Information +
Item 4. General Description of Registrant Investment Summary; Investment
Objective; Fund Characteristics
and Investment Program; Summary
of Fund Fees and Expenses;
Voting Rights; Investing in Debt
Securities; Investment
Practices; Performance
Information; Capital Stock;
Purchase and Redemption of
Shares
Item 5. Management of the Fund Summary of Fund Fees and
Expenses; Management of the
Fund; Expenses and Management
Fee
Item 6. Capital Stock and Other Securities Voting Rights; Capital Stock;
Dividends and Taxation
Item 7. Purchase of Securities Being Offered Purchase and Redemption of
Shares; NAV, Pricing, and
Effective Date
Item 8. Redemption or Repurchase Purchase and Redemption of
Shares; NAV, Pricing, and
Effective Date
Item 9. Pending Legal Proceedings +
PART B
Item 10. Cover Page Cover Page
Item 11. Table of Contents Table of Contents
Item 12. General Information and History +
Item 13. Investment Objectives and Policies Investment Objective and
Policies; Risk Factors;
Investment Program; Portfolio
Management Practices; Investment
Restrictions; Investment
Performance
Item 14. Management of the Registrant Management of Fund
Item 15. Control Persons and Principal Principal Holders of
Holders of Securities Securities
Item 16. Investment Advisory and Other Investment Management
Services Services; Custodian;
Independent Accountants;
Legal Counsel
Item 17. Brokerage Allocation Portfolio Transactions
Item 18. Capital Stock and Other Securities Dividends; Capital Stock
<PAGE>
PAGE 4
Item 19. Purchase, Redemption and Pricing Redemptions in Kind;
of Securities Being Offered Pricing of Securities; Net Asset
Value Per Share; Federal and
State Registration of Shares;
Ratings of Commercial Paper;
Ratings of Corporate Debt
Securities
Item 20. Tax Status Tax Status
Item 21. Underwriters Distributor for Fund
Item 22. Calculation of Yield Quotations of
Money Market Funds +
Item 23. Financial Statements +
PART C
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C to this Registration Statement
___________________________________
+ Not applicable or negative answer
<PAGE>
PAGE 5
Prospectus for the T. Rowe Price Fixed Income Series, Inc., dated May 15,
1994, should be inserted here.
PAGE 1
LIMITED-TERM BOND Investment Summary
PORTFOLIO The Fund seeks a high level of income
consistent with modest price fluctuation by
investing primarily in investment grade
debt securities. It is designed for fixed
income investors seeking a conservative,
income producing investment which
experiences relatively modest changes in
share price.
Prospectus ___________________________________________
May 15, 1994 T. Rowe Price Associates, Inc. (T. Rowe
T. Rowe Price Fixed Price) was founded in 1937 by the late
Income Series, Inc. Thomas Rowe Price, Jr. As of December 31,
1993, the firm and its affiliates managed
over $____ billion including more than $___
billion in conservative, dividend focused
Table of Contents equity investments, for over three million
individual and institutional investor
Investment Summary accounts.
Investment Objective __________________________________________
Fund Characteristics and This prospectus contains information that a
Investment Program prospective Contract Holder or Participant
Summary of Fund Fees should know about the Fund before
and Expenses investing. Please keep it for future
Voting Rights reference. A Statement of Additional
Investing in Debt Information for the Fund (dated May 15,
Securities 1994) has been filed with the Securities
Investment Practices and Exchange Commission and is incorporated
Performance Information by reference in this prospectus. It is
Capital Stock available at no charge by calling: 1-800-
Purchase and Redemption 638-5660.
of Shares
NAV, Pricing, and THESE SECURITIES HAVE NOT BEEN APPROVED OR
Effective Date DISAPPROVED BY THE SECURITIES AND EXCHANGE
Dividends and Taxation COMMISSION, OR ANY STATE SECURITIES
Management of the Fund COMMISSION, NOR HAS THE SECURITIES AND
Expenses and Management EXCHANGE COMMISSION, OR ANY STATE
Fee SECURITIES COMMISSION, PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
________________________ ___________________________________________
INVESTMENT OBJECTIVE The Fund's investment objective is to seek
a high level of income consistent with
modest price fluctuation by investing
primarily in investment grade securities.
PAGE 2
________________________ ___________________________________________
FUND CHARACTERISTICS AND The Fund's investment program (described
INVESTMENT PROGRAM below) is intended to result in lower share
price fluctuation than a long-term bond
fund. Additionally, the Fund is expected
to provide a yield above that of a money
market fund but below that of a long-term
bond fund.
The Fund will invest at least 65% of its
total assets in short-and intermediate-
term, investment grade debt securities.
These will include corporate, government
and mortgage-backed securities. The Fund's
dollar weighted effective average maturity
will not exceed five years, although there
are no maturity limitations on individual
securities purchased. 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 portfolio will be
invested in securities rated in the four
highest credit categories by a nationally
recognized rating agency, or, if unrated,
of equivalent quality as determined by T.
Rowe Price. To enhance yield, up to 10% of
total assets can be invested in below-
investment-grade securities ("junk bonds"),
including those with the lowest rating.
While initially the Fund is expected to
concentrate its investments in domestic
securities, it may over time invest up to
35% of its total assets in foreign fixed
income securities. When investing in
foreign securities, the Fund will seek to
reduce the volatility stemming from
currency exposure by hedging a substantial
portion, but not necessarily all, of its
non-dollar investments back to the U.S.
dollar. Currency risk can not be
eliminated entirely, and there is no
guarantee this hedging will work. In
PAGE 3
addition, hedging costs are paid for out of
the Fund's capital and reflected in the net
asset value per share (not the Fund's
yield).
The Fund's share price and yield will
fluctuate with changing market conditions,
and your investment may be worth more or
less when redeemed than when purchased.
The Fund should not be relied upon as a
complete investment program, nor used to
play short-term swings in the bond markets.
The Fund cannot guarantee it will achieve
its investment objective.
Shares of the Fund are currently being
offered to insurance company separate
accounts established for the purpose of
funding variable annuity and variable life
contracts. Variable annuity and variable
life Contract Holders or Participants are
not the shareholders of the Fund. Rather,
the separate account is the shareholder,
although voting rights may be passed
through to Contract Holders or
Participants. The variable annuity and
variable life contracts are described in
separate prospectuses issued by the
insurance companies. The Fund assumes no
responsibility for such prospectuses
Please see Investment Practices for a
more complete description of the Fund's
investments.
________________________ ___________________________________________
SUMMARY OF FUND FEES AND Management Fee. The Fund pays T. Rowe
EXPENSES Price a single, all-inclusive fee of 0.70%
of the Fund's average daily net assets to
cover investment management and operating
expenses.
Variable Annuity and Variable Life Charges.
Variable annuity and variable life fees and
charges are in addition to those described
above and are described in the variable
annuity and variable life prospectuses.
PAGE 4
________________________ ___________________________________________
VOTING RIGHTS The shares of the Fund have equal voting
rights. The various insurance companies
own all the outstanding shares of the Fund
in their separate accounts that are
registered under the 1940 Act. Under
current law the insurance companies must
vote the shares held in registered separate
accounts in accordance with voting
instructions received from variable
Contract Holders or Participants having the
right to give such instructions.
________________________ ___________________________________________
INVESTING IN DEBT Total Return Components. The Fund's total
SECURITIES return consists of (1) the change in its
net asset value per share and (2) the
income it generates. The net asset value
of the Fund will be affected primarily by
changes in interest rate levels, the
maturity of individual portfolio holdings,
and the quality of the securities held.
Interest Rates. A bond is a contractual
A general explanation. debt obligation to repay a stated debt
amount (the principal) on a specified
date (the maturity) plus a specified rate
of interest for the use of the money. Most
bonds pay a fixed rate of interest known as
the coupon rate, which is fixed for the
term of the bond. A bond's yield reflects
the fixed annual interest as a percent of
its current price. This price (the bond's
market value) must increase or decrease in
order to adjust the bond's yield to current
interest rate levels. Therefore, bond
prices generally move in the opposite
direction of interest rates.
Maturity. Movements in interest rates
typically have a greater effect on the
prices of longer term bonds than on those
with shorter maturities. The following
table illustrates the effect of a change in
interest rates on a $1,000 bond with a 7%
coupon.
PAGE 5
Principal value if rates:
_________________________
Increase Decrease
________ ________
Bond--Maturity 1% 1%
___________________________________________
Short - 2 years $982 $1,019
Intermediate - 5 years$959 $1,043
Long-term - 20 years $901 $1,116
___________________________________________
This table is for illustrative purposes
only and should not be taken as
representative of expected changes in the
share price of the Fund.
T. Rowe Price will actively manage the
Fund's portfolio maturity, consistent with
the Fund's objective, according to its
interest rate outlook. During periods of
rising interest rates, a shorter average
maturity may be adopted to cushion the
effect of falling bond prices on the Fund's
share price. When rates are falling and
bond prices are rising, a longer average
maturity may be sought.
Credit Analysis. The quality of a bond is
measured by credit risk--the ability of the
issuer to meet interest and principal
payments on a timely basis. Issuers who
are believed to be good credit risks
receive high quality ratings, and those
believed to be poor credit risks receive
low quality ratings. High-quality bonds
involve less credit risk and typically
offer a lower yield than bonds of low
quality. In determining the quality of an
issuer, T. Rowe Price considers publicly
available ratings, but places primary
emphasis on its own credit analysis. This
analysis may differ from the evaluations of
public rating agencies, such as Moody's
Investors Service, Inc. or Standard &
PAGE 6
Poor's Corporation. T. Rowe Price may also
buy bonds from unrated issuers, which are
not necessarily of lower quality, but may
be less marketable.
________________________ ___________________________________________
INVESTMENT PRACTICES This section takes a detailed look at some
of the types of securities the funds may
hold in their portfolios and the various
kinds of investment practices that may be
used in day-to-day portfolio management.
The funds' investment programs are subject
to further restrictions and risks described
in the "Statement of Additional
Information."
Shareholder approval is required to
substantively change the Fund's objective
and to change certain investment
restrictions noted in the following section
as "fundamental policies." The managers
also follow certain "operating policies"
which can be changed without shareholder
approval. However, significant changes are
discussed with shareholders in fund
reports.
Types of Portfolio Securities
In seeking to meet its investment
objectives, the Fund may invest in any type
of interest-bearing security whose yield,
credit quality, and maturity
characteristics are consistent with the
Fund's investment program. These and some
of the other investment techniques the Fund
may use are described in the following
pages.
Fundamental Policy. The Fund will not
purchase a security if, as a result, with
respect to 75% of the fund's total assets,
more than 5% of its total assets would be
invested in securities of the issuer.
Bonds. A bond is an interest-bearing
security - an IOU - issued by companies or
governmental units. The issuer has a
PAGE 7
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 rises when interest rates fall, and
vice versa so its yield is current (see the
table on page __).
Bonds may be secured (backed by specified
collateral) or unsecured (backed by the
issuer's general creditworthiness).
Certain bonds have interest rates that are
adjusted periodically in order to minimize
fluctuations of their principal value. The
maturity of those securities may be
shortened under certain specified
conditions.
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,
PAGE 8
servicing agent, or of the financial
institution providing the credit support.
Mortgage-Backed Securities. The Fund may
invest in a variety of mortgage 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
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 also issue mortgage-backed
securities.
Mortgage securities are subject to
regular principal prepayments as homeowners
pay down or pay off their mortgages. When
interest rates fall, the pace of mortgage
refinancings picks up. 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, however, mortgage-backed securities
have historically experienced smaller price
declines than comparable quality bonds.
Additional mortgage-related securities in
which the Fund may invest include:
0 Collateralized Mortgage Obligations
(CMOs). CMOs are debt securities that are
PAGE 9
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 more
definite maturities than is the case with
the underlying bonds. CMOs may pay fixed or
variable rates of interest, and certain
CMOs have priority over others with respect
to the receipt of prepayments.
0 Stripped Mortgage Securities. Stripped
mortgage securities are created by
separating the interest and principal
payments generated by a pool of
mortgage-backed bonds to create two classes
of securities. Generally, one class
receives only interest payments (IOs) and
one principal payments (POs).
IOs and POs are acutely sensitive to
interest rate changes and to the rate of
principal prepayments. They are very
volatile in price and may have lower
liquidity than most mortgage-backed
securities. Certain CMOs may also exhibit
these qualities, especially those which pay
variable rates of interest which adjust
inversely with and more rapidly than
short-term interest rates. 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.
Hybrid Instruments. These instruments can
combine the characteristics of securities,
futures and options. For example, the
principal amount, redemption or conversion
terms of a security could be related to the
market price of some commodity, currency or
securities index. Such securities may bear
interest or pay dividends at below market
PAGE 10
(or even relatively nominal) rates. Under
certain conditions, the redemption value of
such an investment could be zero. Hybrids
can have volatile prices and limited
liquidity and their use by the Fund may not
be successful.
Operating Policy. The Fund may invest up
to 10% of its total assets in hybrid
instruments.
Private Placements (Restricted Securities).
These securities are sold directly to a
small number of investors, usually
institutions. Unlike public offerings, such
securities are not registered with the SEC.
Although certain of these securities may be
readily sold, for example under Rule 144A,
the sale of others may involve substantial
delays and additional costs.
Operating Policy. The Fund will not invest
more than 15% of its net assets in illiquid
securities.
Foreign Securities. The Fund may invest in
foreign securities. These include non-
dollar denominated securities traded
outside of the U.S. and dollar denominated
securities traded in the U.S. (such as
ADRs). Such investments increase a
portfolio's diversification and may enhance
return, but they also involve some special
risks such as exposure to potentially
adverse local political and economic
developments; nationalization and exchange
controls; potentially lower liquidity and
higher volatility; possible problems
arising from accounting, disclosure,
settlement, and regulatory practices that
differ from U.S. standards; and the chance
that fluctuations in foreign exchange rates
will decrease the investment's value
(favorable changes can increase its value).
PAGE 11
Operating Policy. The Fund may invest up to
35% of its total assets in foreign
securities.
Types of Management Practices Cash
Position. The Fund will hold a certain its
portion of assets in money market
securities, including repurchase
agreements, in the two highest rating
categories, maturing in one year or less.
For temporary, defensive purposes, the Fund
may invest without limitation in such
securities. This reserve position provides
flexibility in meeting redemptions,
expenses, and the timing of new
investments, and serves as a short-term
defense during periods of unusual market
volatility.
Borrowing Money and Transferring Assets.
The Fund can borrow money from banks as a
temporary measure for emergency purposes,
to facilitate redemption requests, or for
other purposes consistent with the funds'
investment objectives and program. Such
borrowings may be collateralized with Fund
assets, subject to restrictions.
Fundamental Policy. Borrowings may not
exceed 33 1/3% of total Fund assets.
Operating Policies. The Fund may not
transfer as collateral any portfolio
securities except as necessary in
connection with permissible borrowings or
investments, and then such transfers may
not exceed 33 1/3% of the Fund's total
assets. The Fund may not purchase
additional securities when borrowings
exceed 5% of total assets.
Futures and Options. Futures are often used
to manage risk, because they enable the
investor to buy or sell an asset in the
future at an agreed upon price. Options
give the investor the right, but not the
obligation, to buy or sell an asset at a
PAGE 12
predetermined price in the future. The Fund
may buy and sell futures contracts (and
options on such contracts) to manage its
exposure to changes in interest rates, bond
prices, and foreign currencies; as an
efficient means of adjusting its overall
exposure to certain markets; and also 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 a fund's net assets. 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
such as interest rate swaps and the
purchase or sale of interest rate caps and
floors, to preserve a return or spread on a
particular investment or portion of its
portfolio, to create synthetic securities,
or to structure transactions designed for
other non-speculative purposes.
Operating Policy. The Fund will not invest
more than 10% of its total assets in
interest rate swaps.
PAGE 13
Managing Foreign Currency Risk. Investors
in non-U.S. dollar securities may "hedge"
their exposure to potentially unfavorable
currency changes by purchasing a contract
to exchange one currency for another on
some future date at a specified exchange
rate. In certain circumstances, a "proxy
currency" may be substituted for the
currency in which the investment is
denominated, a strategy known as "proxy
hedging." The Fund might also use these
contracts to create a synthetic bond issued
by a U.S. company but with the dollar
component transformed into a foreign
currency. Although foreign currency
transactions will be used primarily to
protect the Fund's non-dollar securities
from adverse currency movements, they
involve the risk that anticipated currency
movements will not occur and the fund's
total return could be reduced.
Operating Policy. The Fund will normally
conduct its foreign exchange transactions
in cash or by entering into forward
currency contracts expiring in less than
one year.
Lending of Portfolio Securities. Like other
mutual funds, the Fund may lend securities
to broker-dealers, other institutions, or
other persons to earn additional income.
The principal risk is the potential
insolvency of the broker-dealer or other
borrower. In this event, the Fund could
experience delays in recovering its
securities and possibly capital losses.
Fundamental Policy. The value of loaned
securities may not exceed 33 1/3% of the
Fund's total assets.
When-issued 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. The price of
PAGE 14
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. Depending
on the fund's other investments, purchase
of these securities could increase the
level of fluctuations in the Fund's net
asset value.
Portfolio Transactions. The Fund will not
generally trade in securities for short-
term profits, but when circumstances
warrant, securities may be purchased and
sold without regard to the length of time
held. The portfolio turnover rate for the
Fund is not expected to exceed 200%.
High Yield Investing. The total return and
yield of lower quality (high yield) bonds
can be expected to fluctuate more than the
total return and yield of higher quality,
shorter-term bonds. Low-quality bonds are
regarded as predominantly speculative with
respect to the issuer's continuing ability
to meet principal and interest payments.
Successful investment in low and
lower-medium 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, because such events
could lessen the ability of highly
leveraged companies to make principal and
interest payments. These bonds are 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.
PAGE 15
________________________ ___________________________________________
PERFORMANCE INFORMATION Total Return. The Fund may advertise total
return figures on both a cumulative and
compound average annual basis and compare
them to various indices, other mutual funds
or other performance measures. (The total
return of the Fund will consist primarily
of dividend income and secondarily of
capital appreciation or depreciation).
Cumulative total return compares the amount
invested at the beginning of a period with
the amount redeemed at the end of the
period, assuming the reinvestment of all
dividends and capital gain distributions.
The compound average annual total return
indicates a yearly compound average of the
Fund's performance, derived from the
cumulative total return. The annual
compound rate of return for the Fund may
vary from any average. Further information
about the Fund's performance is contained
in its annual report which is available
free of charge.
Yield. The Fund 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
Fund include the effect of deducting the
Fund's expenses, but may not include
charges and expenses attributable to any
particular insurance product. Since you
can only purchase shares of the Fund
through an insurance product, you should
carefully review the prospectus of the
insurance product you have chosen for
information on relevant charges and
expenses. Excluding these charges from
quotations of the Fund's performance has
the effect of increasing the performance
quoted.
PAGE 16
________________________ ___________________________________________
CAPITAL STOCK T. Rowe Price Fixed Income Series, Inc.
(the Corporation) is a Maryland corporation
organized in 1994 and registered with the
Securities and Exchange Commission under
the Investment Company Act of 1940 as a
diversified, open-end investment company,
commonly known as a "mutual fund." The
Corporation is a series fund and has the
authority to issue other series in addition
to the T. Rowe Price Limited-Term Bond
Portfolio currently in existence. A mutual
fund, such as the Fund, enables
shareholders to: (1) obtain professional
management of investments, including T.
Rowe Price's proprietary research; (2)
diversify their portfolio to a greater
degree than would be generally possible if
they were investing as individuals and
thereby reduce, but not eliminate risks;
and (3) simplify the recordkeeping and
reduce transaction costs associated with
investments.
The Fund has an Investment Advisory
Committee composed of the following
members: Veena A. Kutler, President, Paul
W. Boltz, Robert P. Campbell, George J.
Collins, Christy M. DiPietro, Heather R.
Landon, Joan R. Potee, Robert M. Rubino,
and Edward A. Wiese. 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.
Shareholder Rights. The Fund issues one
class of capital stock, all shares of which
have equal rights with regard to voting,
redemptions, dividends, distributions, and
liquidations. Fractional shares have
voting rights and participate in any
distributions and dividends. Shareholders
have no preemptive or conversion rights;
nor do they have cumulative voting rights.
When the Fund's shares are issued, they are
fully paid and nonassessable. The Fund
PAGE 17
does not routinely hold annual meetings of
shareholders. However, if shareholders
representing at least 10% of all votes of
the Fund entitled to be cast so desire,
they may call a special meeting of
shareholders of the Fund for the purpose of
voting on the question of the removal of
any director(s). The total authorized
capital stock of the Fund consists of
1,000,000,000 shares, each having a par
value of $.0001. As of the date of this
prospectus, T. Rowe Price owned 10,000
shares of the Fund which represented all of
the Fund's outstanding shares. As of
February 28, 1994, there were _________
shareholders in the other ___ T. Rowe Price
Funds.
________________________ ___________________________________________
PURCHASE AND REDEMPTION For instructions on how to purchase and
OF SHARES redeem shares of the Fund, read the
separate account prospectus.
Shares of the Fund are sold and redeemed
without the imposition of any sales
commission or redemption charge. However,
certain deferred sales charges and other
charges may apply to the annuity contract.
Those charges are disclosed in the separate
account prospectus.
________________________ ___________________________________________
NAV, PRICING, AND Net Asset Value Per Share (NAV). The NAV
EFFECTIVE DATE per share, or share price, for the Fund is
normally determined as of 4:00 pm Eastern
Time (ET) each day the New York Stock
Exchange is open. The Fund's share price
is calculated by subtracting its
liabilities from its total assets and
dividing the result by the total number of
shares outstanding. Among other things,
the Fund's liabilities include accrued
expenses and dividends payable, and its
total assets include portfolio securities
valued at market as well as income accrued
but not yet received.
Purchases. The insurance companies
purchase shares of the Fund for separate
PAGE 18
accounts, using premiums allocated by the
Contract Holders or Participants. Shares
are purchased at the NAV next determined
after the insurance company receives the
premium payment in acceptable form.
Initial and subsequent payments allocated
to the Fund are subject to the limits
stated in the separate account prospectus
issued by the insurance company.
Redemptions. The insurance companies
redeem shares of the Fund to make benefit
or surrender payments under the terms of
its Contracts. Redemptions are processed
on any day on which the New York Stock
Exchange is open and are priced at the
Fund's NAV next determined after the
insurance company receives a surrender
request in acceptable form.
Proceeds. Payment for redeemed shares
will be made promptly, but in no event
later than seven days. However, the right
of redemption may be suspended or the date
of payment postponed in accordance with the
Investment Company Act of 1940. The amount
received upon redemption of the shares of
the Fund may be more or less than the
amount paid for the shares, depending on
the fluctuations in the market value of the
assets owned by the Fund.
The Fund reserves the right to change the
time at which purchases, redemptions, and
exchanges are priced if the New York Stock
Exchange closes at a time other than 4:00
pm ET or an emergency exists.
________________________ ___________________________________________
DIVIDENDS AND TAXATION For a discussion of the tax status of your
variable annuity contract, refer to the
prospectus of your insurance company's
separate account.
Dividends and Distributions. The policy of
the Fund is to distribute all of its net
investment income and net capital gains to
its shareholders, which are the separate
PAGE 19
accounts established by the various
insurance companies in connection with
their issuance of variable life insurance
and variable annuity contracts. Dividends
are declared daily and paid monthly. All
Fund distributions made to a separate
account will be reinvested automatically in
additional Fund shares, unless a
shareholder (separate account) elects to
receive distributions in cash. Under
current law, dividends and distributions
made by the Fund to separate accounts,
generally, are not taxable to the separate
accounts, the insurance company or the
Contract Holder, provided that separate
account meets the diversification
requirements of Section 817 (h) of the
Internal Revenue Code of 1986, as amended
and other tax related requirements are
satisfied. The Fund intends to diversify
its investments in the manner required
under Code Section 817(h).
Foreign Transactions. If the Fund pays
nonrefundable taxes to foreign governments
during the year, the taxes will reduce the
Fund's dividends.
________________________ ___________________________________________
MANAGEMENT OF THE FUND Investment Manager. T. Rowe Price is
responsible for selection and management of
the Fund's portfolio investments. T. Rowe
Price serves as investment manager to a
variety of individual and institutional
investors, including limited and real
estate partnerships and other mutual funds.
Board of Directors. The management of the
Fund's business and affairs is the
responsibility of the Fund's Board of
Directors.
Portfolio Transactions. Decisions with
respect to the purchase and sale of the
Fund's portfolio securities are made by T.
Rowe Price. The Fund's Board of Directors
has authorized T. Rowe Price to utilize
certain brokers indirectly related to T.
PAGE 20
Rowe Price in the capacity of broker in
connection with the execution of the Fund's
portfolio transactions.
Investment Services. T. Rowe Price
Investment Services, Inc., a wholly-owned
subsidiary of T. Rowe Price, is the
distributor for this Fund as well as all
other T. Rowe Price Funds.
Transfer and Dividend Disbursing Agent,
Shareholder Servicing and Administrative.
TRP Services, a wholly-owned subsidiary of
T. Rowe Price, serves the Fund as transfer
and dividend disbursing agent. T. Rowe
Price calculates the daily share price and
maintains the portfolio and general
accounting records of the Fund. The
address for TRP Services is 100 East Pratt
Street, Baltimore, Maryland 21202.
________________________ ___________________________________________
EXPENSES AND MANAGEMENT Under the management agreement, all
FEE expenses of the Fund will be paid by T.
Rowe Price, except interest, taxes,
brokerage commissions, directors' fees and
expenses (including counsel fees and
expenses) and extraordinary expenses. The
Board of Directors of the Fund reserves the
right to impose additional fees against
shareholder accounts to defray expenses
which would otherwise be paid by T. Rowe
Price under the management agreement. The
Board does not anticipate levying such
charges; such a fee, if charged, may be
retained by the Fund or paid to T. Rowe
Price.
The Management Fee. The Fund pays T. Rowe
Price an annual all-inclusive fee of 0.70%
based on its average daily net assets.
This fee pays for investment management
services and other operating costs. The
Fund calculates and accrues the fee daily.
(See "Transaction Costs and Fund
Expenses.")
PAGE 21
________________________ ___________________________________________
OTHER INSURANCE PRODUCTS The Fund may serve as an investment medium
for both variable annuity contracts and
variable life insurance policies. Shares
of the Fund may be offered to separate
accounts established by any number of
insurance companies. The Fund currently
does not foresee any disadvantages to
variable annuity contract owners due to the
fact that the Fund may serve as an
investment medium for both variable life
insurance policies and annuity contracts;
however, due to differences in tax
treatment or other considerations, it is
theoretically possible that the interests
of owners of annuity contracts and
insurance policies for which the Fund
serves as an investment medium might at
some time be in conflict. However, the
Fund's Board of Directors is required to
monitor events to identify any material
conflicts between variable annuity contract
owners and variable life policy owners, and
will determine what action, if any, should
be taken in the event of such a conflict.
If such a conflict were to occur, an
insurance company participating in the Fund
might be required to redeem the investment
of one or more of its separate accounts
from the Fund. This might force the Fund
to sell securities at disadvantageous
prices.
PAGE 22
For Information Call: Prospectus
T. Rowe Price Limited-Term
Bond Portfolio
May 15, 1994
T. ROWE PRICE
Invest With ConfidenceR
<PAGE>
PAGE 6
STATEMENT OF ADDITIONAL INFORMATION
T. ROWE PRICE FIXED INCOME SERIES, INC.
T. Rowe Price Limited-Term Bond Fund
(the "Fund")
Shares of the Fund may be offered to insurance company separate accounts
established for the purpose of funding variable annuity and variable life
contracts. Variable annuity and variable life Contract Holders or
Participants are not the shareholders of the Fund. Rather, the separate
account is the shareholder, although voting rights may be passed through to
Contract Holders or Participants. The variable annuity and variable life
contracts are described in separate prospectuses issued by the insurance
companies. The Fund assumes no responsibility for such prospectuses.
In the future, it is possible that the Fund may offer its shares to
separate accounts funding variable annuities, variable life insurance or other
insurance products of other insurance companies.
This Statement of Additional Information is not a prospectus but should
be read in conjunction with the Fund's prospectus dated May 15, 1994, which
may be obtained from T. Rowe Price Investment Services, Inc., 100 East Pratt
Street, Baltimore, Maryland 21202.
The date of this Statement of Additional Information is May 15, 1994.
<PAGE>
PAGE 7
TABLE OF CONTENTS
Page Page
Adjustable Rate Securities . . . . Investment Objectives and Policies
Adjustable Rate Mortgage Securities Investment Performance. . . . . .
Asset-Backed Securities. . . . . . Investment Programs
Capital Stock (pages __-__ in Prospectus) .
(pages __-__ in Prospectus). . . Investment Restrictions . . . . .
Custodian. . . . . . . . . . . . . Legal Counsel . . . . . . . . . .
Distributor for Fund . . . . . . . Lending of Portfolio Securities .
Dividends. . . . . . . . . . . . . Management of Fund. . . . . . . .
Federal and State Registration Money Market Securities . . . .
of Shares. . . . . . . . . . . . Mortgage-Related Securities . . .
Foreign Currency Transactions. . . Net Asset Value Per Share . . . .
Foreign Securities . . . . . . . . Options . . . . . . . . . . . . .
Futures Contracts. . . . . . . . . Portfolio Transactions. . . . . .
Hybrid Commodity and Security Pricing of Securities . . . . .
Instruments. . . . . . . . . . . Principal Holders of Securities .
Illiquid or Restricted Securities. Ratings of Commercial Paper . . .
Independent Accountants. . . . . . Ratings of Corporate Debt Securities
Industry Concentration . . . . . . Repurchase Agreements . . . . . .
Interest Rate Transactions . . . . Risk Factors. . . . . . . . . . .
Investment Management Services Tax Status (pages __-__ in Prospectus)
(pages __-__ in Prospectus). . . When-Issued Securities and Forward
Investment Objectives Commitment Contracts. . . . .
(pages __-__ in Prospectus). . . Yield Information . . . . . . . .
INVESTMENT OBJECTIVE AND POLICIES
The following information supplements the discussion of the Fund's
investment objective and policies discussed on pages __ through __ and __
through __ of the prospectus. The Fund will not make a material change in its
investment objective without obtaining shareholder approval. Unless otherwise
specified, the investment programs and restrictions of the Fund is not
fundamental policies. The Fund's operating policies are subject to change by
its Board of Directors without shareholder approval. However, shareholders
will be notified of a material change in an operating policy. The 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.
The Fund's investment objective is to seek a high level of income
consistent with modest price fluctuation by investing primarily in investment
grade securities. The strategy of the Fund described below is intended to
result in lower share price fluctuation than a long-term bond fund.
Additionally, the Fund is expected to provide a yield above that of a money
market fund but below that of a long-term bond fund.
The Fund will invest at least 65% of its total assets in short-and
intermediate-term, investment grade debt securities. These will include
corporate, government and mortgage- backed securities. There are no maturity
limitations on individual securities purchased, but the Fund's dollar weighted
effective average maturity will not exceed five years. Targeting effective
maturity provides additional flexibility in portfolio management but, all else
PAGE 8
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 portfolio will be invested in securities rated
in the four highest credit categories by a nationally recognized rating
agency, or, if unrated, of equivalent quality as determined by T. Rowe Price.
To enhance yield, up to 10% of assets can be invested in below-investment-
grade securities, including those with the lowest rating.
While initially the Fund is expected to concentrate its investments in
domestic securities, it may over time invest up to 35% of its assets in
foreign fixed income securities. When investing in foreign securities, the
Fund will seek to reduce the volatility stemming from currency exposure by
hedging a substantial portion, but not necessarily all, of its non-dollar
investments back to the U.S. dollar. Currency risk can not be eliminated
entirely, and there is no guarantee this hedging will work. In addition,
hedging costs are paid for out of the Fund's capital and reflected in the net
asset value per share (not the Fund's yield).
RISK FACTORS
Because of its investment policy, the Fund may not be suitable or
appropriate for all investors. The Fund is not a money market fund and is not
an appropriate investment for those whose primary objective is principal
stability. There is risk in all investment. The Fund is designed for the
investor who seeks to participate in a diversified portfolio of short- and
intermediate-term investment grade bonds and other debt securities (up to 10%
of which may be below investment grade) which provide a higher rate of income
than a money market fund and less risk of capital fluctuation than a portfolio
of long-term debt securities. The value of the portfolio securities of the
Fund will fluctuate based upon market conditions. Although the Fund seeks to
reduce risk by investing in a diversified portfolio, such diversification does
not eliminate all risk. There can, of course, be no assurance that the Fund
will achieve these results. Reference is also made to the sections entitled
"Types of Securities" and "Portfolio Management Practices" for discussions of
the risks associated with the investments and practices described therein as
they apply to the Fund.
Debt Obligations. Yields on short and intermediate-term securities are
dependent on a variety of factors, including the general conditions of the
money and bond markets, the size of a particular offering, the maturity of the
obligation, and the credit quality and rating of the issue. Debt securities
with longer maturities tend to have higher yields and are generally subject to
potentially greater capital appreciation and depreciation than obligations
with shorter maturities and lower yields. The market prices of debt
securities usually vary, depending upon available yields. An increase in
interest rates will generally reduce the value of portfolio investments, and a
decline in interest rates will generally increase the value of portfolio
investments. The ability of the Fund to achieve its investment objective is
also dependent on the continuing ability of the issuers of the debt securities
in which the Fund invests to meet its obligations for the payment of interest
and principal when due. Although the Fund seeks to reduce risk by portfolio
diversification, credit analysis (considered by T. Rowe Price to be among the
most stringent in the investment management industry), and attention to trends
in the economy, industries and financial markets, such efforts will not
eliminate all risk. There can, of course, be no assurance that the Fund will
achieve its investment objective.
PAGE 9
Mortgage Securities. The Fund may invest significantly in mortgage
securities. Because they consist of underlying mortgages, Mortgage Securities
may not be an effective means of "locking in" long-term interest rates due to
the need for the Fund to reinvest scheduled and unscheduled principal
payments. 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 and adversely affect the
return to the Fund. Conversely, in a rising interest rate environment such
prepayments can be reinvested at higher prevailing interest rates which will
reduce the potential effect of capital depreciation to which bonds are subject
when interest rates rise. In addition, prepayments of mortgage securities
purchased at a premium (or discount) will cause such securities to be paid off
at par, resulting in a loss (gain) to the Fund. T. Rowe Price will actively
manage the Fund's portfolio in an attempt to reduce the risk associated with
investment in mortgage-backed securities.
After purchase by a Fund, a security may cease to be rated or its rating
may be reduced below the minimum required for purchase by the Fund. For the
Fund, neither event would require a sale of such security by the Fund.
However, T. Rowe Price Associates, Inc. ("T. Rowe Price") will consider such
event in its determination of whether the Fund should continue to hold the
security. To the extent that the ratings given by Moody's Investors Service,
Inc. ("Moody's"), Standard & Poor's Corporation ("S&P"), or Fitch Investors
Service, Inc. ("Fitch") 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, T.
Rowe Price, under the supervision of the Fund's Board of Directors, determines
whether the unrated security is of a quality comparable to that which the Fund
is allowed to purchase.
The Fund's share price and yield will fluctuate with changing market
conditions, and your investment may be worth more or less when redeemed than
when purchased. The Fund should not be relied upon as a complete investment
program, nor used to play short-term swings in the bond markets. The Fund
cannot guarantee it will achieve its investment objective.
INVESTMENT PROGRAM
In addition to the investments described in the Fund's prospectus, the
Fund may invest in the following:
TYPES OF SECURITIES
Adjustable Rate Securities
Generally, the maturity of a security 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. However,
certain securities may be issued with adjustable interest rates that are reset
PAGE 10
periodically by pre-determined formulas or indexes in order to minimize
movements in the principal value of the investment. Such securities may have
long-term maturities, but may be treated as a short-term investment under
certain conditions. Generally, as interest rates decrease or increase, the
potential for capital appreciation or depreciation on these securities is less
than for fixed-rate obligations. These securities may take the following
forms:
Variable Rate Securities. Variable rate instruments may take the form
of domestic certificates of deposit which provide for the adjustment of
its interest rate on set dates and which, upon adjustment, can
reasonably be expected to have a market value which approximates its par
value. A variable rate instrument, the principal amount of which is
scheduled to be paid in 397 calendar 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 which 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 calendar 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.
Floating Rate Securities. Floating rate may take the form of corporate
or bank holding company notes or Eurodollar certificates of deposit.
These instruments provide for the adjustment of its 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. 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. An instrument that is issued or
guaranteed by the U.S. Government or any agency thereof which has a
variable rate of interest readjusted no less frequently than every 762
days may be deemed to have a maturity equal to the period remaining
until the next readjustment of the interest rate.
Put Option Bonds. Long-term obligations with maturities longer than one
year may provide purchasers an optional or mandatory tender of the
security at par value at predetermined intervals, often ranging from one
month to several years (e.g., a 30-year bond with a five-year tender
period). These instruments are deemed to have a maturity equal to the
period remaining to the put date.
When-Issued Securities and Forward Commitment Contracts
The Fund may purchase securities on a "when-issued" or delayed delivery
basis ("When-Issueds") and the Fund may purchase securities on a forward
commitment basis ("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 for take place at a later date. Normally, the
settlement date occurs within 90 days of the purchase for When-Issueds, but
may be substantially longer for Forwards. During the period between purchase
and settlement, no payment is made by the Fund to the issuer and no interest
accrues to the Fund. The purchase of these securities will result in a loss
if its 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 these risks are. At the
PAGE 11
time the Fund makes the commitment to purchase these securities, it will
record the transaction and reflect the value of the security in determining
its net asset value. The Fund will cover these securities by maintaining cash
and/or liquid, high-grade debt securities with its custodian bank equal in
value to commitments for them during the time between purchase and settlement.
Therefore, the longer this period, the longer the time 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.
Money Market Securities
The money market securities that the Fund may invest in are generally
limited to those described below.
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 its maturities.
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.
Bank Obligations. Certificates of deposit, bankers' acceptances, and
other short-term debt obligations. Certificates of deposit are short-term
obligations of commercial banks. A bankers' acceptance is a time draft drawn
on a commercial bank by a borrower, usually in connection with international
commercial transactions. Certificates of deposit may have fixed or variable
rates. The Fund may invest in U.S. banks, foreign branches of U.S. banks,
U.S. branches of foreign banks and foreign branches of foreign banks.
Short-term Corporate Debt Securities. Outstanding nonconvertible
corporate debt securities (e.g., bonds and debentures) which have one year or
less remaining to maturity. Corporate notes may have fixed, variable, or
floating rates.
Commercial Paper. Short-term promissory notes issued by corporations
primarily to finance short-term credit needs. Certain notes may have floating
or variable rates.
Foreign Government Securities. Issued or guaranteed by a foreign
government, province, instrumentality, political subdivision or similar unit
thereof.
Savings and Loan Obligations. Negotiable certificates of deposit and
other short-term debt obligations of savings and loan associations.
PAGE 12
Supranational Agencies. The Fund may also invest in the securities of
certain supranational entities, such as the International Development Bank.
Mortgage-Related Securities
Investment in Mortgage-Backed Securities
Mortgage-Backed Securities. Mortgage-backed securities are securities
representing an interest in a pool of mortgages. The mortgages may be of a
variety of types, including adjustable rate, conventional 30-year fixed rate,
graduated payment, and 15-year. Principal and interest payments made on the
mortgages in the underlying mortgage pool are passed through to the Fund.
This is in contrast to traditional bonds where principal is normally paid back
at maturity in a lump sum. Unscheduled prepayments of principal shorten the
securities' weighted average life and may lower its 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.
The mortgage-backed securities that the Fund may invest in include, but
are not limited to, those described below.
U.S. Government Agency Mortgage-Backed Securities. These are
obligations issued or guaranteed by the United States Government or one of its
agencies or instrumentalities, such as the Government National Mortgage
Association ("Ginnie Mae" or "GNMA"), the Federal National Mortgage
Association ("Fannie Mae" or "FNMA") and the Federal Home Loan Mortgage
Corporation ("Freddie Mac" or "FHLMC"). FNMA and FHLMC obligations are not
backed by the full faith and credit of the U.S. Government as GNMA
certificates are, but FNMA and FHLMC securities are supported by the
instrumentality's right to borrow from the United States Treasury. U.S.
Government Agency Mortgage-Backed Certificates provide for the pass-through to
investors of its pro-rata share of monthly payments (including any
prepayments) made by the individual borrowers on the pooled mortgage loans,
net of any fees paid to the guarantor of such securities and the servicer of
the underlying mortgage loans. Each of GNMA, FNMA and FHLMC guarantees timely
distributions of interest to certificate holders. GNMA and FNMA guarantee
timely distributions of scheduled principal. FHLMC has in the past guaranteed
only the ultimate collection of principal of the underlying mortgage loan;
however, FHLMC now issues Mortgage-Backed Securities (FHLMC Gold PCs) which
also guarantee timely payment of monthly principal reductions.
Ginnie Mae Certificates. Ginnie Mae is a wholly-owned corporate
instrumentality of the United States within the Department of Housing and
Urban Development. The National Housing Act of 1934, as amended (the "Housing
Act"), authorizes Ginnie Mae to guarantee the timely payment of the principal
of and interest on certificates that are based on and backed by a pool of
mortgage loans insured by the Federal Housing Administration under the Housing
Act, or Title V of the Housing Act of 1949 ("FHA Loans"), or guaranteed by the
Department of Veterans Affairs under the Servicemen's Readjustment Act of
PAGE 13
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.
Fannie Mae Certificates. Fannie Mae is a federally chartered and
privately owned corporation organized and existing under the Federal National
Mortgage Association Charter Act of 1938. FNMA Certificates represent a pro-
rata interest in a group of mortgage loans purchased by Fannie Mae. FNMA
guarantees the timely payment of principal and interest on the securities it
issues. The obligations of FNMA are not backed by the full faith and credit
of the U.S. Government.
Freddie Mac Certificates. Freddie Mac is a corporate instrumentality of
the United States created pursuant to the Emergency Home Finance Act of 1970,
as amended (the "FHLMC Act"). Freddie Mac Certificates represent a pro-rata
interest in a group of mortgage loans (a "Freddie Mac Certificate group")
purchased by Freddie Mac. Freddie Mac guarantees timely payment of interest
and principal on certain securities it issues and timely payment of interest
and eventual payment of principal on other securities is issues. The
obligations of Freddie Mac are obligations solely of Freddie Mac and are not
backed by the full faith and credit of the U.S. Government.
When mortgages in the pool underlying a Mortgage-Backed Security are
prepaid by mortgagors or by result of foreclosure, such principal payments are
passed through to the certificate holders. Accordingly, the life of the
Mortgage-Backed Security is likely to be substantially shorter than the stated
maturity of the mortgages in the underlying pool. Because of such variation
in prepayment rates, it is not possible to predict the life of a particular
Mortgage-Backed Security, but FHA statistics indicate that 25- to 30-year
single family dwelling mortgages have an average life of approximately 12
years. The majority of Ginnie Mae Certificates are backed by mortgages of
this type, and, accordingly, the generally accepted practice treats Ginnie Mae
Certificates as 30-year securities which prepay full in the 12th year. FNMA
and Freddie Mac Certificates may have differing prepayment characteristics.
Fixed Rate Mortgage-Backed Securities bear a stated "coupon rate" which
represents the effective mortgage rate at the time of issuance, less certain
fees to GNMA, FNMA and FHLMC for providing the guarantee, and the issuer for
assembling the pool and for passing through monthly payments of interest and
principal.
Payments to holders of Mortgage-Backed Securities consist of the monthly
distributions of interest and principal less the applicable fees. The actual
yield to be earned by a holder of Mortgage-Backed Securities is calculated by
dividing interest payments by the purchase price paid for the Mortgage-Backed
Securities (which may be at a premium or a discount from the face value of the
certificate).
Monthly distributions of interest, as contrasted to semi-annual
distributions which are common for other fixed interest investments, have the
effect of compounding and thereby raising the effective annual yield earned on
Mortgage-Backed Securities. Because of the variation in the life of the pools
of mortgages which back various Mortgage-Backed Securities, and because it is
impossible to anticipate the rate of interest at which future principal
payments may be reinvested, the actual yield earned from a portfolio of
PAGE 14
Mortgage-Backed Securities will differ significantly from the yield estimated
by using an assumption of a certain life for each Mortgage-Backed Security
included in such a portfolio as described above.
Stripped Agency Mortgage-Backed Securities
Stripped Agency Mortgage-Backed securities represent interests in a pool
of mortgages, the cash flow of which has been separated into its interest and
principal components. "IOs" (interest only securities) receive the interest
portion of the cash flow while "POs" (principal only securities) receive the
principal portion. Stripped Agency Mortgage-Backed Securities may be issued
by U.S. Government Agencies or by private issuers similar to those described
below with respect to CMOs and privately-issued mortgage-backed certificates.
As interest rates rise and fall, the value of IOs tends to move in the same
direction as interest rates. The value of the other mortgage-backed
securities described herein, like other debt instruments, will tend to move in
the opposite direction compared to interest rates. Under the Internal Revenue
Code of 1986, as amended (the "Code"), POs may generate taxable income from
the current accrual of original issue discount, without a corresponding
distribution of cash to the Fund.
The cash flows and yields on IO and PO classes are extremely sensitive
to the rate of principal payments (including prepayments) on the related
underlying mortgage assets. For example, a rapid or slow rate of principal
payments may have a material adverse effect on the prices of IOs or POs,
respectively. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, an investor may fail to recoup fully its
initial investment in an IO class of a stripped mortgage-backed security, even
if the IO class is rated AAA or Aaa or is derived from a full faith and credit
obligation. Conversely, if the underlying mortgage assets experience slower
than anticipated prepayments of principal, the price on a PO class will be
affected more severely than would be the case with a traditional
mortgage-backed security.
The staff of the Securities and Exchange Commission has advised the Fund
that it believes the Fund should treat IOs and POs, other than
government-issued IOs or POs backed by fixed rate mortgages, as illiquid
securities and, accordingly, limit its investments in such securities,
together with all other illiquid securities, to 15% of the Fund's net assets.
Under the Staff's position, the determination of whether a particular
government-issued IO and PO backed by fixed rate mortgages may be made on a
case by case basis under guidelines and standards established by the Fund's
Board of Directors. The Fund's Board of Directors has delegated to T. Rowe
Price the authority to determine the liquidity of these investments based on
the following guidelines: the type of issuer; type of collateral, including
age and prepayment characteristics; rate of interest on coupon relative to
current market rates and the effect of the rate on the potential for
prepayments; complexity of the issue's structure, including the number of
tranches; size of the issue and the number of dealers who make a market in the
IO or PO. The Fund will treat non-government-issued IOs and POs not backed by
fixed or adjustable rate mortgages as illiquid unless and until the Securities
and Exchange Commission modifies its position.
Collateralized Mortgage Obligations (CMOs)
CMOs are bonds that are collateralized by whole loan mortgages or
mortgage pass-through securities. The bonds issued in a CMO deal are divided
into groups, and each group of bonds is referred to as a "tranche". Under the
PAGE 15
traditional CMO structure, the cash flows generated by the mortgages or
mortgage pass-through securities in the collateral pool are used to first pay
interest and then pay principal to the CMO bondholders. The bonds issued
under a CMO structure are retired sequentially as opposed to the pro rata
return of principal found in traditional pass-through obligations. Subject to
the various provisions of individual CMO issues, the cash flow generated by
the underlying collateral (to the extent it exceeds the amount required to pay
the stated interest) is used to retire the bonds. Under the CMO structure,
the repayment of principal among the different tranches is prioritized in
accordance with the terms of the particular CMO issuance. The "fastest-pay"
tranche of bonds, as specified in the prospectus for the issuance, would
initially receive all principal payments. When that tranche of bonds is
retired, the next tranche, or tranches, in the sequence, as specified in the
prospectus, receive all of the principal payments until they are retired. The
sequential retirement of bond groups continues until the last tranche, or
group of bonds, is retired. Accordingly, the CMO structure allows the issuer
to use cash flows of long maturity, monthly-pay collateral to formulate
securities with short, intermediate and long final maturities and expected
average lives.
In recent years, new types of CMO structures have evolved. These
include floating rate CMOs, planned amortization classes, accrual bonds and
CMO residuals. These newer structures affect the amount and timing of
principal and interest received by each tranche from the underlying
collateral. Under certain of these new structures, given classes of CMOs have
priority over others with respect to the receipt of prepayments on the
mortgages. Therefore, depending on the type of CMOs in which the Fund
invests, the investment may be subject to a greater or lesser risk of
prepayment than other types of mortgage-related securities.
The primary risk of any mortgage security is the uncertainty of the
timing of cash flows. For CMOs, the primary risk results from the rate of
prepayments on the underlying mortgages serving as collateral. An increase or
decrease in prepayment rates (resulting from a decrease or increase in
mortgage interest rates) will affect the yield, average life and price of
CMOs. The prices of certain CMOs, depending on its structure and the rate of
prepayments, can be volatile. Some CMOs may also not be as liquid as other
securities.
U.S. Government Agency Multiclass Pass-Through Securities. Unlike CMOs,
U.S. Government Agency Multiclass Pass-Through Securities, which include FNMA
Guaranteed REMIC Pass-Through Certificates and FHLMC Multi-Class Mortgage
Participation Certificates, are ownership interests in a pool of Mortgage
Assets. Unless the context indicates otherwise, all references herein to CMOs
include multiclass pass-through securities.
Multi-Class Residential Mortgage Securities. Such securities represent
interests in pools of mortgage loans to residential home buyers made by
commercial banks, savings and loan associations or other financial
institutions. Unlike GNMA, FNMA and FHLMC securities, the payment of
principal and interest on Multi-Class Residential Mortgage Securities is not
guaranteed by the U.S. Government or any of its agencies. Accordingly, yields
on Multi-Class Residential Mortgage Securities have been historically higher
than the yields on U.S. government mortgage securities. However, the risk of
loss due to default on such instruments is higher since they are not
guaranteed by the U.S. Government or its agencies. Additionally, pools of
such securities may be divided into senior or subordinated segments. Although
subordinated mortgage securities may have a higher yield than senior mortgage
PAGE 16
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.
Privately-Issued Mortgage-Backed Certificates. The Fund may also invest
in pass-through certificates issued by non-governmental issuers. Pools of
conventional residential mortgage loans created by such issuers generally
offer a higher rate of interest than government and government-related pools
because there are no direct or indirect government guarantees of payment.
Timely payment of interest and principal of these pools is, however, generally
supported by various forms of insurance or guarantees, including individual
loan, title, pool and hazard insurance. The insurance and guarantees are
issued by government entities, private insurance or the mortgage poolers.
Such insurance and guarantees and the creditworthiness of the issuers thereof
will be considered in determining whether a mortgage-related security meets
the Fund's quality standards. The Fund may buy mortgage-related securities
without insurance or guarantees if through an examination of the loan
experience and practices of the poolers, the investment manager determines
that the securities meet the Fund's quality standards.
The Fund expects that governmental, government-related or private
entities may create mortgage loan pools offering pass-through investments in
addition to those described above. The mortgages underlying these securities
may be alternative mortgage instruments, that is, mortgage instruments whose
principal or interest payments may vary or whose terms to maturity may differ
from customary long-term fixed rate mortgages. As new types of mortgage-
related securities are developed and offered to investors, the investment
manager will, consistent with the Fund's objective, policies and quality
standards, consider making investments in such new types of securities.
Adjustable Rate Mortgage Securities ("ARMs"). 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 its interest rates at regular intervals of one year or
less. ARM securities are a less effective means of locking in long-term rates
than fixed rate mortgages since the income from adjustable rate mortgages will
increase during periods of rising interest rates and decline during periods of
falling rates.
Characteristics of Adjustable Rate Mortgage Securities. The interest
rates paid on the mortgages underlying ARM securities are reset at regular
intervals by adding an interest rate margin to a specified interest rate
index. There are three main categories of indices: those based on U.S.
Treasury securities such as the constant maturity treasury rate (CMT); those
derived from a calculated measure such as a cost of funds index (COFI) or a
moving average of mortgage rates; and those based on certain actively traded
or prominent short-term rates such as the LIBOR. Some indices, such as the
one-year constant maturity Treasury rate, closely mirror changes in interest
rate levels. Others, such as COFI tend to lag behind changes in market rate
levels but reset monthly thus tending to be somewhat less volatile. Such a
PAGE 17
delay in adjusting to changes in interest rates may cause securities owned by
the Fund to increase or decrease in value, particularly during periods between
interest adjustment dates.
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 its income
from increasing to levels commensurate with prevailing interest rates.
Conversely, interest rate floors on ARM securities may cause its 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, its prices are
considered to have volatility characteristics which approximate the average
period of time until the next adjustment of the interest rate. As a result,
the principal volatility of ARM securities may be more comparable to short-
and intermediate-term securities than to longer term fixed rate mortgage
securities. Prepayments however, will increase its principal volatility. See
also the discussion of Mortgage-Backed Securities on page 8.
Asset-Backed Securities
The Fund may invest a portion of its assets in debt obligations known as
asset-backed securities.
The credit quality of most asset-backed securities depends primarily on
the credit quality of the assets underlying such securities, how well the
entity issuing the security is insulated from the credit risk of the
originator or any other affiliated entities and the amount and quality of any
credit support provided to the securities. The rate of principal payment on
asset-backed securities generally depends on the rate of principal payments
received on the underlying assets which in turn may be affected by a variety
of economic and other factors. As a result, the yield on any asset-backed
security is difficult to predict with precision and actual yield to maturity
may be more or less than the anticipated yield to maturity. Asset-backed
securities may be classified either as pass-through certificates or
collateralized obligations.
Pass-through certificates are asset-backed securities which represent an
undivided fractional ownership interest in an underlying pool of assets.
Pass-through certificates usually provide for payments of principal and
interest received to be passed through to its holders, usually after deduction
for certain costs and expenses incurred in administering the pool. Because
pass-through certificates represent an ownership interest in the underlying
assets, the holders thereof bear directly the risk of any defaults by the
obligors on the underlying assets not covered by any credit support. See
"Types of Credit Support".
Asset-backed securities issued in the form of debt instruments, also
known as collateralized obligations, are generally issued as the debt of a
special purpose entity organized solely for the purpose of owning such assets
and issuing such debt. Such assets are most often trade, credit card or
automobile receivables. The assets collateralizing such asset-backed
securities are pledged to a trustee or custodian for the benefit of the
PAGE 18
holders thereof. Such issuers generally hold no assets other than those
underlying the asset-backed securities and any credit support provided. As a
result, although payments on such asset-backed securities are obligations of
the issuers, in the event of defaults on the underlying assets not covered by
any credit support (see "Types of Credit Support"), the issuing entities are
unlikely to have sufficient assets to satisfy its obligations on the related
asset-backed securities.
Methods of Allocating Cash Flows. While many asset-backed securities
are issued with only one class of security, many asset-backed securities are
issued in more than one class, each with different payment terms. Multiple
class asset-backed securities are issued for two main reasons. First,
multiple classes may be used as a method of providing credit support. This is
accomplished typically through creation of one or more classes whose right to
payments on the asset-backed security is made subordinate to the right to such
payments of the remaining class or classes. See "Types of Credit Support".
Second, multiple classes may permit the issuance of securities with payment
terms, interest rates or other characteristics differing both from those of
each other and from those of the underlying assets. Examples include so-
called "strips" (asset-backed securities entitling the holder to
disproportionate interests with respect to the allocation of interest and
principal of the assets backing the security), and securities with class or
classes having characteristics which mimic the characteristics of non-asset-
backed securities, such as floating interest rates (i.e., interest rates which
adjust as a specified benchmark changes) or scheduled amortization of
principal.
Asset-backed securities in which the payment streams on the underlying
assets are allocated in a manner different than those described above may be
issued in the future. The Fund may invest in such asset-backed securities if
such investment is otherwise consistent with its investment objectives and
policies and with the investment restrictions of the Fund.
Types of Credit Support. Asset-backed securities are often backed by a
pool of assets representing the obligations of a number of different parties.
To lessen the effect of failures by obligors on underlying assets to make
payments, such securities may contain elements of credit support. Such credit
support falls into two classes: liquidity protection and protection against
ultimate default by an obligor on the underlying assets. Liquidity protection
refers to the provision of advances, generally by the entity administering the
pool of assets, to ensure that scheduled payments on the underlying pool are
made in a timely fashion. Protection against ultimate default ensures
ultimate payment of the obligations on at least a portion of the assets in the
pool. Such protection may be provided through guarantees, insurance policies
or letters of credit obtained from third parties, through various means of
structuring the transaction or through a combination of such approaches.
Examples of asset-backed securities with credit support arising out of the
structure of the transaction include "senior-subordinated securities"
(multiple class asset-backed securities with certain classes subordinate to
other classes as to the payment of principal thereon, with the result that
defaults on the underlying assets are borne first by the holders of the
subordinated class) and asset-backed securities that have "reserve funds"
(where cash or investments, sometimes funded from a portion of the initial
payments on the underlying assets, are held in reserve against future losses)
or that have been "overcollateralized" (where the scheduled payments on, or
the principal amount of, the underlying assets substantially exceeds that
required to make payment of the asset-backed securities and pay any servicing
or other fees). The degree of credit support provided on each issue is based
PAGE 19
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 asset-
backed security.
Automobile Receivable Securities. The 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 its respective Automobile Contracts only by filing a
financing statement and by having the servicer of the Automobile Contracts,
which is usually the originator of the Automobile Contracts, take custody
thereof. In such circumstances, if the servicer of the Automobile Contracts
were to sell the same Automobile Contracts to another party, in violation of
its obligation not to do so, there is a risk that such party could acquire an
interest in the Automobile Contracts superior to that of the holders of
Automobile Receivable Securities. Also although most Automobile Contracts
grant a security interest in the motor vehicle being financed, in most states
the security interest in a motor vehicle must be noted on the certificate of
title to create an enforceable security interest against competing claims of
other parties. Due to the large number of vehicles involved, however, the
certificate of title to each vehicle financed, pursuant to the Automobile
Contracts underlying the Automobile Receivable Security, usually is not
amended to reflect the assignment of the seller's security interest for the
benefit of the holders of the Automobile Receivable Securities. Therefore,
there is the possibility that recoveries on repossessed collateral may not, in
some cases, be available to support payments on the securities. In addition,
various state and federal securities laws give the motor vehicle owner the
right to assert against the holder of the owner's Automobile Contract certain
defenses such owner would have against the seller of the motor vehicle. The
assertion of such defenses could reduce payments on the Automobile Receivable
Securities.
Credit Card Receivable Securities. The Fund may invest in Asset Backed
Securities backed by receivables from revolving credit card agreements
("Credit Card Receivable Securities"). Credit balances on revolving credit
card agreements ("Accounts") are generally paid down more rapidly than are
Automobile Contracts. Most of the Credit Card Receivable Securities issued
publicly to date have been Pass-Through Certificates. In order to lengthen
the maturity of Credit Card Receivable Securities, most such securities
provide for a fixed period during which only interest payments on the
underlying Accounts are passed through to the security holder and principal
payments received on such Accounts are used to fund the transfer to the pool
of assets supporting the related Credit Card Receivable Securities of
additional credit card charges made on an Account. The initial fixed period
usually may be shortened upon the occurrence of specified events which signal
a potential deterioration in the quality of the assets backing the security,
such as the imposition of a cap on interest rates. The ability of the issuer
to extend the life of an issue of Credit Card Receivable Securities thus
depends upon the continued generation of additional principal amounts in the
underlying accounts during the initial period and the non-occurrence of
specified events. An acceleration in cardholders' payment rates or any other
PAGE 20
event which shortens the period during which additional credit card charges on
an Account may be transferred to the pool of assets supporting the related
Credit Card Receivable Security could shorten the weighted average life and
yield of the Credit Card Receivable Security.
Credit cardholders are entitled to the protection of a number of state
and federal consumer credit laws, many of which give such holder the right to
set off certain amounts against balances owed on the credit card, thereby
reducing amounts paid on Accounts. In addition, unlike most other Asset
Backed Securities, Accounts are unsecured obligations of the cardholder.
Other Assets. T. Rowe Price anticipates that Asset Backed Securities
backed by assets other than those described above will be issued in the
future. The Fund may invest in such securities in the future if such
investment is otherwise consistent with its investment objective and policies.
Hybrid Instruments
Hybrid Instruments have recently been developed and combine the elements
of futures contracts or options with those of debt, preferred equity or a
depository instrument. Often these Hybrid Instruments are indexed to the
price of a commodity, a particular currency or a domestic or foreign debt or
equity securities index. Hybrid Instruments may take a variety of forms,
including, but not limited to, debt instruments with interest or principal
payments or redemption terms determined by reference to the value of a
currency or commodity or securities index at a future point in time, preferred
stock with dividend rates determined by reference to the value of a currency,
or convertible securities with the conversion terms related to a particular
commodity.
The risks of investing in Hybrid Instruments reflect a combination of
the risks from investing in securities, options, futures, and currencies,
including volatility and lack of liquidity. Reference is made to the
discussion of futures, forward contracts, and options herein, for a discussion
of these risks. Further, the prices of the Hybrid Instrument and the related
commodity or currency may not move in the same direction or at the same time.
Hybrid Instruments may bear interest or pay preferred dividends at below
market (or even relatively nominal) rates. Alternatively, Hybrid Instruments
may bear interest at above market rates but bear an increased risk of
principal loss (or gain). In addition, because the purchase and sale of
Hybrid Instruments could take place in an over-the-counter market or in a
private transaction between the Fund and the seller of the Hybrid Instrument,
the creditworthiness of the contra party to the transaction would be a risk
factor which the Fund would have to consider. Hybrid Instruments also may not
be subject to regulation of the Commodities Futures Trading Commission
("CFTC"), which generally regulates the trading of commodity futures by U.S.
persons the SEC, which regulates the offer and sale of securities, or any
other governmental regulatory authority.
Foreign Securities
Because the Fund may invest in foreign securities, investment in the
Fund involves risks that are different in some respects from an investment in
a fund which invests only in debt obligations or securities of U.S. domestic
issuers. Foreign investments may be affected favorably or unfavorably by
changes in currency rates and exchange control regulation. There may be less
publicly available information about a foreign company than about a U.S.
company, and foreign companies may not be subject to accounting, auditing, and
PAGE 21
financial reporting standards and requirements comparable to those applicable
to U.S. companies. There may be less governmental supervision of securities
markets, brokers and issuers of securities. Securities of some foreign
companies are less liquid or more volatile than securities of U.S. companies,
and foreign brokerage commissions and custodian fees are generally higher than
in the United States. Settlement practices may include delays and may differ
from those customary in U.S. markets. Investments in foreign securities may
also be subject to other risks different from those affecting U.S.
investments, including local political or economic developments, expropriation
or nationalization of assets, restrictions on foreign investment and
repatriation of capital, imposition of withholding taxes on dividend or
interest payments, currency blockage, which would prevent cash from being
brought back to the United States, and difficulty in enforcing legal rights
outside the United States.
Illiquid or Restricted Securities
Restricted securities may be sold only in privately negotiated
transactions or in a public offering with respect to which a registration
statement is in effect under the Securities Act of 1933 (the "1933 Act").
Where registration is required, the Fund may be obligated to pay all or part
of the registration expenses and a considerable period may elapse between the
time of the decision to sell and the time the Fund may be permitted to sell a
security under an effective registration statement. If, during such a period,
adverse market conditions were to develop, the Fund might obtain a less
favorable price than prevailed when it decided to sell. Restricted securities
will be priced at fair value as determined in accordance with procedures
prescribed by the Fund's Board of Directors. If through the appreciation of
illiquid securities or the depreciation of liquid securities, the Fund should
be in a position where more than 15% of the value of its net assets are
invested in illiquid assets, including restricted securities, the Fund will
take appropriate steps to protect liquidity.
Notwithstanding the above, the Fund may purchase securities which, while
privately placed, are eligible for purchase and sale under Rule 144A under the
1933 Act. This rule permits certain qualified institutional buyers, such as
the Fund, to trade in privately placed securities even though such securities
are not registered under the 1933 Act. T. Rowe Price under the supervision of
the Fund's Board of Directors, will consider whether securities purchased
under Rule 144A are illiquid and thus subject to the Fund's restriction of
investing no more than 15% of its assets in illiquid securities. A
determination of whether a Rule 144A security is liquid or not is a question
of fact. In making this determination, T. Rowe Price will consider the
trading markets for the specific security taking into account the unregistered
nature of a Rule 144A security. In addition, T. Rowe Price could consider the
(1) frequency of trades and quotes, (2) number of dealers and potential
purchases, (3) dealer undertakings to make a market, and (4) the nature of the
security and of marketplace trades (e.g., the time needed to dispose of the
security, the method of soliciting offers and the mechanics of transfer). The
liquidity of Rule 144A securities would be monitored, and if as a result of
changed conditions it is determined that a Rule 144A security is no longer
liquid, a Fund's holdings of illiquid securities would be reviewed to
determine what, if any, steps are required to assure that the Fund does not
invest more than 15% of its assets in illiquid securities. Investing in Rule
144A securities could have the effect of increasing the amount of a Fund's
assets invested in illiquid securities if qualified institutional buyers are
unwilling to purchase such securities.
PAGE 22
There are, of course, other types of securities that are, or may become
available, which are similar to the foregoing and the Fund may invest in these
securities.
PORTFOLIO MANAGEMENT PRACTICES
Foreign Currency Transactions
A forward foreign currency contract ("forward contract") involves an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. These contracts are
principally traded in the interbank market conducted directly between currency
traders (usually large, commercial banks) and its customers. A forward
contract generally has no deposit requirement, and no commissions are charged
at any stage for trades.
The Fund may enter into forward contracts for a variety of purposes in
connection with the management of the foreign securities portion of its
portfolio. The Fund's use of such contracts would include, but not be limited
to, the following:
First, when the Fund enters into a contract for the purchase or sale of
a security denominated in a foreign currency, it may desire to "lock in" the
U.S. dollar price of the security. By entering into a forward contract for
the purchase or sale, for a fixed amount of dollars, of the amount of foreign
currency involved in the underlying security transactions, the Fund will be
able to protect itself against a possible loss resulting from an adverse
change in the relationship between the U.S. dollar and the subject foreign
currency during the period between the date the security is purchased or sold
and the date on which payment is made or received.
Second, when T. Rowe Price believes that one currency may experience a
substantial movement against another currency, including the U.S. dollar, it
may enter into a forward contract to sell or buy the amount of the former
foreign currency, approximating the value of some or all of the Fund's
portfolio securities denominated in such foreign currency. Alternatively,
where appropriate, the Fund may hedge all or part of its foreign currency
exposure through the use of a basket of currencies or a proxy currency where
such currency or currencies act as an effective proxy for other currencies.
In such a case, the Fund may enter into a forward contract where the amount of
the foreign currency to be sold exceeds the value of the securities
denominated in such currency. The use of this basket hedging technique may be
more efficient and economical than entering into separate forward contracts
for each currency held in the Fund. The precise matching of the forward
contract amounts and the value of the securities involved will not generally
be possible since the future value of such securities in foreign currencies
will change as a consequence of market movements in the value of those
securities between the date the forward contract is entered into and the date
it matures. The projection of short-term currency market movement is
extremely difficult, and the successful execution of a short-term hedging
strategy is highly uncertain. Other than as set forth above, and immediately
below, the Fund will not enter into such forward contracts or maintain a net
exposure to such contracts where the consummation of the contracts would
obligate each Fund to deliver an amount of foreign currency in excess of the
value of the Fund's portfolio securities or other assets denominated in that
currency. The Fund, however, in order to avoid excess transactions and
PAGE 23
transaction costs, may maintain a net exposure to forward contracts in excess
of the value of the Fund's portfolio securities or other assets to which the
forward contracts relate (including accrued interest to the maturity of the
forwards on such securities provided the excess amount is "covered" by liquid,
high-grade debt securities, denominated in any currency, at least equal at all
times to the amount of such excess. For these purposes, "the securities or
other assets to which the forward contracts relate" may be securities or
assets denominated in a single currency, or where proxy forwards are used,
securities denominated in more than one currency). Under normal
circumstances, consideration of the prospect for currency parities will be
incorporated into the longer term investment decisions made with regard to
overall diversification strategies. However, T. Rowe Price believes that it
is important to have the flexibility to enter into such forward contracts when
it determines that the best interests of the Fund will be served.
Third, the Fund may use forward contracts when the Fund wishes to hedge
out of the dollar into a foreign currency in order to create a synthetic bond
or money market instrument -- the security would be issued in U.S. dollars but
the dollar component would be transformed into a foreign currency through a
forward contract.
At the maturity of a forward contract, the Fund may sell the portfolio
security and make delivery of the foreign currency, or it may retain the
security and either extend the maturity of the forward contract (by "rolling"
that contract forward) or may initiate a new forward contract.
As indicated above, it is impossible to forecast with absolute precision
the market value of portfolio securities at the expiration of the forward
contract. Accordingly, it may be necessary for the Fund to purchase
additional foreign currency on the spot market (and bear the expense of such
purchase) if the market value of the security is less than the amount of
foreign currency the Fund is obligated to deliver and if a decision is made to
sell the security and make delivery of the foreign currency. Conversely, it
may be necessary to sell on the spot market some of the foreign currency
received upon the sale of the portfolio security if its market value exceeds
the amount of foreign currency a Fund is obligated to deliver. However, as
noted, in order to avoid excessive transactions and transaction costs, the
Fund may use liquid, high-grade debt securities, denominated in any currency,
to cover the amount by which the value of a forward contract exceeds the value
of the securities to which it relates.
If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss (as described below) to the
extent that there has been movement in forward contract prices. If the Fund
engages in an offsetting transaction, it may subsequently enter into a new
forward contract to sell the foreign currency. Should forward prices decline
during the period between the Fund's entering into a forward contract for the
sale of a foreign currency and the date it enters into an offsetting contract
for the purchase of the foreign currency, the Fund will realize a gain to the
extent the price of the currency it has agreed to sell exceeds the price of
the currency it has agreed to purchase. Should forward prices increase, the
Fund will suffer a loss to the extent of the price of the currency it has
agreed to purchase exceeds the price of the currency it has agreed to sell.
The Fund's dealing in forward foreign currency exchange contracts will
generally be limited to the transactions described above. However, the Fund
reserves the right to enter into forward foreign currency contracts for
different purposes and under different circumstances. Of course, the Fund is
PAGE 24
not required to enter into forward contracts with regard to its foreign
currency-denominated securities and will not do so unless deemed appropriate
by T. Rowe Price. It also should be realized that this method of hedging
against a decline in the value of a currency does not eliminate fluctuations
in the underlying prices of the securities. It simply establishes a rate of
exchange at a future date. Additionally, although such contracts tend to
minimize the risk of loss due to a decline in the value of the hedged
currency, at the same time, they tend to limit any potential gain which might
result from an increase in the value of that currency.
Although the Fund values its assets daily in terms of U.S. dollars, it
does not intend to convert its holdings of foreign currencies into U.S.
dollars on a daily basis. It will do so from time to time, and investors
should be aware of the costs of currency conversion. Although foreign
exchange dealers do not charge a fee for conversion, they do realize a profit
based on the difference (the "spread") between the prices at which they are
buying and selling various currencies. Thus, a dealer may offer to sell a
foreign currency to the Fund at one rate, while offering a lesser rate of
exchange should the Fund desire to resell that currency to the dealer.
Lending of Portfolio Securities
For the purpose of realizing additional income, the Fund may make
secured loans of portfolio securities amounting to not more than 33 1/3% of
its total assets. This policy is a fundamental policy. Securities loans are
made to broker-dealers or institutional investors or other persons, pursuant
to agreements requiring that the loans be continuously secured by collateral
at least equal at all times to the value of the securities lent marked to
market on a daily basis. The collateral received will consist of cash, U.S.
government securities, letters of credit or such other collateral as may be
permitted under its investment program. While the securities are being lent,
the Fund will continue to receive the equivalent of the interest or dividends
paid by the issuer on the securities, as well as interest on the investment of
the collateral or a fee from the borrower. The Fund has a right to call each
loan and obtain the securities on five business days' notice or, in connection
with securities trading on foreign markets, within such longer period of time
which coincides with the normal settlement period for purchases and sales of
such securities in such foreign markets. The Fund will not have the right to
vote securities while they are being lent, but it will call a loan in
anticipation of any important vote. The risks in lending portfolio
securities, as with other extensions of secured credit, consist of possible
delay in receiving additional collateral or in the recovery of the securities
or possible loss of rights in the collateral should the borrower fail
financially. Loans will only be made to firms deemed by T. Rowe Price to be
of good standing and will not be made unless, in the judgment of T. Rowe
Price, the consideration to be earned from such loans would justify the risk.
Other Lending/Borrowing
Subject to approval by the Securities and Exchange Commission, the Fund
may make loans to, or borrow funds from, other mutual funds sponsored or
advised by T. Rowe Price or Price-Fleming (collectively, "Price Funds"). The
Fund has no current intention of engaging in these practices at this time.
Repurchase Agreements
The Fund may enter into a repurchase agreement through which an investor
(such as the Fund) purchases a security (known as the "underlying security")
PAGE 25
from a well-established securities dealer or a bank that is a member of the
Federal Reserve System. Any such dealer or bank will be on T. Rowe Price's
approved list and have a credit rating with respect to its short-term debt of
at least A1 by Standard & Poor's Ratings Group, P1 by Moody's Investors
Service, or the equivalent rating by T. Rowe Price. At that time, the bank or
securities dealer agrees to repurchase the underlying security at the same
price, plus specified interest. Repurchase agreements are generally for a
short period of time, often less than a week. Repurchase agreements which do
not provide for payment within seven days will be treated as illiquid
securities. The Fund will only enter into repurchase agreements where (i) the
underlying securities are of the type (excluding maturity limitations) which
the Fund's investment guidelines would allow it to purchase directly, (ii) the
market value of the underlying security, including interest accrued, will be
at all times equal to or exceed the value of the repurchase agreement, and
(iii) payment for the underlying security is made only upon physical delivery
or evidence of book-entry transfer to the account of the custodian or a bank
acting as agent. In the event of a bankruptcy or other default of a seller of
a repurchase agreement, a Fund could experience both delays in liquidating the
underlying security and losses, including: (a) possible decline in the value
of the underlying security during the period while the Fund seeks to enforce
its rights thereto; (b) possible subnormal levels of income and lack of access
to income during this period; and (c) expenses of enforcing its rights.
Options
Writing Covered Call Options
The Fund may write (sell) "covered" call options and purchase options to
close out options previously written by a Fund. In writing covered call
options, a Fund expects to generate additional premium income which should
serve to enhance the Fund's total return and reduce the effect of any price
decline of the security or currency involved in the option. Covered call
options will generally be written on securities or currencies which, in T.
Rowe Price's opinion, are not expected to have any major price increases or
moves in the near future but which, over the long term, are deemed to be
attractive investments for a Fund.
A call option gives the holder (buyer) the "right to purchase" a
security or currency at a specified price (the exercise price) at expiration
of the option (European style) or at any time until a certain date (the
expiration date) (American style). So long as the obligation of the writer of
a call option continues, he may be assigned an exercise notice by the broker-
dealer through whom such option was sold, requiring him to deliver the
underlying security or currency against payment of the exercise price. This
obligation terminates upon the expiration of the call option, or such earlier
time at which the writer effects a closing purchase transaction by
repurchasing an option identical to that previously sold. To secure his
obligation to deliver the underlying security or currency in the case of a
call option, a writer is required to deposit in escrow the underlying security
or currency or other assets in accordance with the rules of a clearing
corporation. The Fund will write only covered call options. This means that
a Fund will own the security or currency subject to the option or an option to
purchase the same underlying security or currency, having an exercise price
equal to or less than the exercise price of the "covered" option, or will
establish and maintain with its custodian for the term of the option, an
account consisting of cash, U.S. government securities or other liquid high-
grade debt obligations having a value equal to the fluctuating market value of
the optioned securities or currencies. In order to comply with the
PAGE 26
requirements of several states, the Fund will not write a covered call option
if, as a result, the aggregate market value of all portfolio securities or
currencies covering call or put options exceeds 25% of the market value of the
Fund's net assets. Should these state laws change or should the Fund obtain a
waiver of its application, the Fund reserves the right to increase this
percentage. In calculating the 25% limit, the Fund will offset, against the
value of assets covering written calls and puts, the value of purchased calls
and puts on identical securities or currencies with identical maturity dates.
Portfolio securities or currencies on which call options may be written
will be purchased solely on the basis of investment considerations consistent
with the Fund's investment objective. The writing of covered call options is
a conservative investment technique believed to involve relatively little risk
(in contrast to the writing of naked or uncovered options, which the Fund will
not do), but capable of enhancing a Fund's total return. When writing a
covered call option, a Fund, in return for the premium, gives up the
opportunity for profit from a price increase in the underlying security or
currency above the exercise price, but conversely retains the risk of loss
should the price of the security or currency decline. Unlike one who owns
securities or currencies not subject to an option, a 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 a 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 a
Fund will receive from writing a call option will reflect, among other things,
the current market price of the underlying security or currency, the
relationship of the exercise price to such market price, the historical price
volatility of the underlying security or currency, and the length of the
option period. Once the decision to write a call option has been made, T.
Rowe Price, in determining whether a particular call option should be written
on a particular security or currency, will consider the reasonableness of the
anticipated premium and the likelihood that a liquid secondary market will
exist for those options. The premium received by a Fund for writing covered
call options will be recorded as a liability of the Fund. This liability will
be adjusted daily to the option's current market value, which will be the
latest sale price at the time at which the net asset value per share of a 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 a Fund to write
another call option on the underlying security or currency with either a
different exercise price or expiration date or both. If a 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
PAGE 27
closing transaction prior to, or concurrently with, the sale of the security
or currency. There is, of course, no assurance that a Fund will be able to
effect such closing transactions at favorable prices. If a Fund cannot enter
into such a transaction, it may be required to hold a security or currency
that it might otherwise have sold. When a Fund writes a covered call option,
it runs the risk of not being able to participate in the appreciation of the
underlying securities or currencies above the exercise price, as well as the
risk of being required to hold on to securities or currencies that are
depreciating in value. This could result in higher transaction costs. The
Fund will pay transaction costs in connection with the writing of options to
close out previously written options. Such transaction costs are normally
higher than those applicable to purchases and sales of portfolio securities.
Call options written by a 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, a 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.
A Fund will realize a profit or loss from a closing purchase transaction
if the cost of the transaction is less or more than the premium received from
the writing of the option. Because increases in the market price of a call
option will generally reflect increases in the market price of the underlying
security or currency, any loss resulting from the repurchase of a call option
is likely to be offset in whole or in part by appreciation of the underlying
security or currency owned by the Fund.
Writing Covered Put Options
The Fund may write American or European style covered put options and
purchase options to close out options previously written by the Fund. A put
option gives the purchaser of the option the right to sell, and the writer
(seller) has the obligation to buy, the underlying security or currency at the
exercise price during the option period (American style) or at the expiration
of the option (European style). So long as the obligation of the writer
continues, he may be assigned an exercise notice by the broker-dealer through
whom such option was sold, requiring him to make payment of the exercise price
against delivery of the underlying security or currency. The operation of put
options in other respects, including its related risks and rewards, is
substantially identical to that of call options.
The Fund would write put options only on a covered basis, which means
that the Fund would maintain in a segregated account cash, U.S. government
securities or other liquid high-grade debt obligations in an amount not less
than the exercise price or the Fund will own an option to sell the underlying
security or currency subject to the option having an exercise price equal to
or greater than the exercise price of the "covered" option at all times while
the put option is outstanding. (The rules of a clearing corporation currently
require that such assets be deposited in escrow to secure payment of the
exercise price.) A Fund would generally write covered put options in
circumstances where T. Rowe Price wishes to purchase the underlying security
or currency for the Fund's portfolio at a price lower than the current market
price of the security or currency. In such event a 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 a Fund would
PAGE 28
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, a Fund, because it does not own the specific securities or
currencies which it may be required to purchase in exercise of the put, cannot
benefit from appreciation, if any, with respect to such specific securities or
currencies. In order to comply with the requirements of several states, the
Fund will not write a covered put option if, as a result, the aggregate market
value of all portfolio securities or currencies covering put or call options
exceeds 25% of the market value of the Fund's net assets. Should these state
laws change or should the Fund obtain a waiver of its application, the Fund
reserves the right to increase this percentage. In calculating the 25% limit,
the Fund will offset, against the value of assets covering written puts and
calls, the value of purchased puts and calls on identical securities or
currencies with identical maturity dates.
Purchasing Put Options
The Fund may purchase American or European style put options. As the
holder of a put option, the Fund has the right to sell the underlying security
or currency at the exercise price at any time during the option period
(American style) or at the expiration of the option (European style). The
Fund may enter into closing sale transactions with respect to such options,
exercise them or permit them to expire. The Fund may purchase put options for
defensive purposes in order to protect against an anticipated decline in the
value of its securities or currencies. An example of such use of put options
is provided below.
A 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 a Fund, as the holder of the put option, is able to sell the
underlying security or currency at the put exercise price regardless of any
decline in the underlying security's market price or currency's exchange
value. For example, a put option may be purchased in order to protect
unrealized appreciation of a security or currency where T. Rowe Price deems it
desirable to continue to hold the security or currency because of tax
considerations. The premium paid for the put option and any transaction costs
would reduce any capital gain otherwise available for distribution when the
security or currency is eventually sold.
The Fund may also purchase put options at a time when the Fund does not
own the underlying security or currency. By purchasing put options on a
security or currency it does not own, a 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, a 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.
PAGE 29
To the extent required by the laws of certain states, the Fund may not
be permitted to commit more than 5% of its assets to premiums when purchasing
put and call options. Should these state laws change or should the Fund
obtain a waiver of its application, the Fund may commit more than 5% of its
assets to premiums when purchasing call and put options. The premium paid by
a Fund when purchasing a put option will be recorded as an asset of the Fund.
This asset will be adjusted daily to the option's current market value, which
will be the latest sale price at the time at which the net asset value per
share of the Fund is computed (close of New York Stock Exchange), or, in the
absence of such sale, the latest bid price. This asset will be terminated
upon expiration of the option, the selling (writing) of an identical option in
a closing transaction, or the delivery of the underlying security or currency
upon the exercise of the option.
Purchasing Call Options
The Fund may purchase American or European style call options. As the
holder of a call option, the Fund has the right to purchase the underlying
security or currency at the exercise price at any time during the option
period (American style) or at the expiration of the option (European style).
The Fund may enter into closing sale transactions with respect to such
options, exercise them or permit them to expire. The Fund may purchase call
options for the purpose of increasing its current return or avoiding tax
consequences which could reduce its current return. The Fund may also
purchase call options in order to acquire the underlying securities or
currencies. Examples of such uses of call options are provided below.
Call options may be purchased by a Fund for the purpose of acquiring the
underlying securities or currencies for its portfolio. Utilized in this
fashion, the purchase of call options enables a 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 a 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, a Fund is partially protected from any
unexpected decline in the market price of the underlying security or currency
and in such event could allow the call option to expire, incurring a loss only
to the extent of the premium paid for the option.
To the extent required by the laws of certain states, the Fund may not
be permitted to commit more than 5% of its assets to premiums when purchasing
call and put options. Should these state laws change or should the Fund
obtain a waiver of its application, the Fund may commit more than 5% of its
assets to premiums when purchasing call and put options. The Fund may also
purchase call options on underlying securities or currencies it owns in order
to protect unrealized gains on call options previously written by it. A call
option would be purchased for this purpose where tax considerations make it
inadvisable to realize such gains through a closing purchase transaction.
Call options may also be purchased at times to avoid realizing losses.
Dealer (Over-the-Counter) Options
The Fund may engage in transactions involving dealer options. Certain
risks are specific to dealer options. While a Fund would look to a clearing
corporation to exercise exchange-traded options, if the Fund were to purchase
a dealer option, it would rely on the dealer from whom it purchased the option
PAGE 30
to perform if the option were exercised. Failure by the dealer to do so would
result in the loss of the premium paid by a Fund as well as loss of the
expected benefit of the transaction.
Exchange-traded options generally have a continuous liquid market while
dealer options have none. Consequently, a 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 a Fund writes a
dealer option, it generally will be able to close out the option prior to its
expiration only by entering into a closing purchase transaction with the
dealer to which the Fund originally wrote the option. While the Fund will
seek to enter into dealer options only with dealers who will agree to and
which are expected to be capable of entering into closing transactions with
the Fund, there can be no assurance that the Fund will be able to liquidate a
dealer option at a favorable price at any time prior to expiration. Until a
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, a Fund may be unable to
liquidate a dealer option. With respect to options written by a Fund, the
inability to enter into a closing transaction may result in material losses to
the Fund. For example, since a Fund must maintain a secured position with
respect to any call option on a security it writes, the Fund may not sell the
assets which it has segregated to secure the position while it is obligated
under the option. This requirement may impair a Fund's ability to sell
portfolio securities or currencies at a time when such sale might be
advantageous.
The Staff of the SEC has taken the position that purchased dealer
options and the assets used to secure the written dealer options are illiquid
securities. The Fund may treat the cover used for written OTC options as
liquid if the dealer agrees that the Fund may repurchase the OTC option it has
written for a maximum price to be calculated by a predetermined formula. In
such cases, the OTC option would be considered illiquid only to the extent the
maximum repurchase price under the formula exceeds the intrinsic value of the
option. Accordingly, the Fund will treat dealer options as subject to the
Fund's limitation on unmarketable securities. If the SEC changes its position
on the liquidity of dealer options, the Fund will change its treatment of such
instrument accordingly.
Interest Rate Transactions
The Fund may enter into various interest rate transactions such as
interest rate swaps and the purchase or sale of interest rate caps and floors,
to preserve a return or spread on a particular investment or portion of its
portfolio, to create synthetic securities, or to structure transactions
designed for other non-speculative purposes.
Interest rate swaps involve the exchange by the Fund with third parties
of its respective commitments to pay or receive interest, e.g., an exchange of
floating rate payments for fixed rate payments. The purchase of an interest
rate cap entitles the purchaser, to the extent that a specified index exceeds
a predetermined interest rate, to receive payments of interest on a
contractually-based principal amount from the party selling the interest rate
cap. The purchase of an interest rate floor entitles the purchaser, to the
extent that a specified index falls below a predetermined interest rate, to
receive payments of interest on a contractually-based principal amount from
the party selling the interest rate floor. In circumstances in which T. Rowe
PAGE 31
Price 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 purchase such an interest rate swap, if the floating rate
payments fell below the level of the fixed rate payment set in the swap
agreement, the Fund's counterparties would pay the Fund's amounts equal to
interest computed at the difference between the fixed and floating rates over
the national principal amount. Such payments would offset or partially offset
the decrease in the payments the Fund would receive in respect of floating
rate assets being hedged. In the case of purchasing an interest rate floor,
if interest rates declined below the floor rate, the Fund would receive
payments from the counterparties which would wholly or partially offset the
decrease in the payments they would receive in respect of the financial
instruments being hedged.
The Fund will usually enter into interest rate swaps on a net basis,
i.e., the two payment streams are netted out, with the Fund receiving or
paying, as the case may be, only the net amount of the two payments. The net
amount of the excess, if any, of the Fund's obligations over its entitlements
with respect to each interest rate swap will be accrued on a daily basis and
an amount of cash or high-quality liquid securities having an aggregate net
asset value at least equal to the accrued excess will be maintained in an
account by the Fund's custodian. If the Fund enters into an interest rate
swap on other than a net basis, the Fund would maintain an account in the full
amount accrued on a daily basis of the Fund's obligations with respect to the
swap. To the extent the Fund sells (i.e., writes) caps and floors, it will
maintain in an account cash or high-quality liquid debt securities having an
aggregate net asset value at least equal to the full amount, accrued on a
daily basis, of the Fund's obligations with respect to any caps or floors.
The Fund will not enter into any interest rate swap, cap or floor transaction
unless the unsecured senior debt or the claims paying ability of the
counterparty thereto is rated at least A by S&P. T. Rowe Price will monitor
the creditworthiness of counterparties on an ongoing basis. If there is a
default by the other parties to such a transaction, the Fund will have
contractual remedies pursuant to the agreements related to the transaction.
The swap market has grown substantially in recent years with a large
number of banks and investment banking firms acting both as principals and as
agents utilizing standardized swap documentation. T. Rowe Price has
determined that, as a result, the swap market has become relative 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.
<PAGE>
PAGE 32
Futures Contracts
Transactions in Futures
The Fund may enter into futures contracts, including interest rate and
currency futures ("futures or futures contracts").
Interest rate or currency futures contracts may be used as a hedge
against changes in prevailing levels of interest rates or currency exchange
rates in order to establish more definitely the effective return on securities
or currencies held or intended to be acquired by the Fund. In this regard,
the Fund could sell interest rate or currency futures as an offset against the
effect of expected increases in interest rates or currency exchange rates and
purchase such futures as an offset against the effect of expected declines in
interest rates or currency exchange rates.
The Fund will enter into futures contracts which are traded on national
or foreign futures exchanges, and are standardized as to maturity date and
underlying financial instrument. Futures exchanges and trading in the United
States are regulated under the Commodity Exchange Act by the Commodity Futures
Trading Commission ("CFTC"). Futures are traded in London, at the London
International Financial Futures Exchange, in Paris, at the MATIF, and in
Tokyo, at the Tokyo Stock Exchange. Although techniques other than the sale
and purchase of futures contracts could be used for the above-referenced
purposes, futures contracts offer an effective and relatively low cost means
of implementing the Fund's objectives in these areas.
Regulatory Limitations
The Fund will engage in futures contracts and options thereon only for
bona fide hedging, yield enhancement, and risk management purposes, in each
case in accordance with rules and regulations of the CFTC and applicable state
law.
The Fund may not purchase or sell futures contracts or related options
if, with respect to positions which do not qualify as bona fide hedging under
applicable CFTC rules, the sum of the amounts of initial margin deposits and
premiums paid on those positions would exceed 5% of the net asset value of the
Fund after taking into account unrealized profits and unrealized losses on any
such contracts it has entered into; provided, however, that in the case of an
option that is in-the-money at the time of purchase, the in-the-money amount
may be excluded in calculating the 5% limitation. For purposes of this policy
options on futures contracts and foreign currency options traded on a
commodities exchange will be considered "related options". This policy may be
modified by the Board of Directors/Trustees without a shareholder vote and
does not limit the percentage of the Fund's assets at risk to 5%.
In accordance with the rules of the State of California, the Fund may
have to apply the above 5% test without excluding the value of initial margin
and premiums paid for bona fide hedging positions.
The Fund's use of futures contracts will not result in leverage.
Therefore, to the extent necessary, in instances involving the purchase of
futures contracts or the writing of call or put options thereon by the Fund,
an amount of cash, U.S. government securities or other liquid, high-grade debt
obligations, equal to the market value of the futures contracts and options
thereon (less any related margin deposits), will be identified in an account
with the Fund's custodian to cover the position, or alternative cover (such as
PAGE 33
owning an offsetting position) will be employed. Assets used as cover or held
in an identified account cannot be sold while the position in the
corresponding option or future is open, unless they are replaced with similar
assets. As a result, the commitment of a large portion of a Fund's assets to
cover or identified accounts could impede portfolio management or the fund's
ability to meet redemption requests or other current obligations.
If the CFTC or other regulatory authorities adopt different (including
less stringent) or additional restrictions, the Fund would comply with such
new restrictions.
Trading in Futures Contracts
A futures contract provides for the future sale by one party and
purchase by another party of a specified amount of a specific financial
instrument (e.g., units of a debt security) for a specified price, date, time
and place designated at the time the contract is made. Brokerage fees are
incurred when a futures contract is bought or sold and margin deposits must be
maintained. Entering into a contract to buy is commonly referred to as buying
or purchasing a contract or holding a long position. Entering into a contract
to sell is commonly referred to as selling a contract or holding a short
position.
Unlike when the Fund purchases or sells a security, no price would be
paid or received by the Fund upon the purchase or sale of a futures contract.
Upon entering into a futures contract, and to maintain the Fund's open
positions in futures contracts, the Fund would be required to deposit with its
custodian in a segregated account in the name of the futures broker an amount
of cash, U.S. government securities, suitable money market instruments, or
liquid, high-grade debt securities, known as "initial margin." The margin
required for a particular futures contract is set by the exchange on which the
contract is traded, and may be significantly modified from time to time by the
exchange during the term of the contract. Futures contracts are customarily
purchased and sold on margins that may range upward from less than 5% of the
value of the contract being traded.
If the price of an open futures contract changes (by increase in the
case of a sale or by decrease in the case of a purchase) so that the loss on
the futures contract reaches a point at which the margin on deposit does not
satisfy margin requirements, the broker will require an increase in the
margin. However, if the value of a position increases because of favorable
price changes in the futures contract so that the margin deposit exceeds the
required margin, the broker will pay the excess to the Fund.
These subsequent payments, called "variation margin," to and from the
futures broker, are made on a daily basis as the price of the underlying
assets fluctuate making the long and short positions in the futures contract
more or less valuable, a process known as "marking to the market." The Fund
expects to earn interest income on its margin deposits.
Although certain futures contracts, by their terms, require actual
future delivery of and payment for the underlying instruments, in practice
most futures contracts are usually closed out before the delivery date.
Closing out an open futures contract purchase or sale is effected by entering
into an offsetting futures contract sale or purchase, respectively, for the
same aggregate amount of the identical securities and the same delivery date.
If the offsetting purchase price is less than the original sale price, the
Fund realizes a gain; if it is more, the Fund realizes a loss. Conversely, if
PAGE 34
the offsetting sale price is more than the original purchase price, the Fund
realizes a gain; if it is less, the Fund realizes a loss. The transaction
costs must also be included in these calculations. There can be no assurance,
however, that the Fund will be able to enter into an offsetting transaction
with respect to a particular futures contract at a particular time. If the
Fund is not able to enter into an offsetting transaction, the Fund will
continue to be required to maintain the margin deposits on the futures
contract.
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.
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.
PAGE 35
Liquidity. The Fund may elect to close some or all of its futures
positions at any time prior to their expiration. The Fund would do so to
reduce exposure represented by long futures positions or short futures
positions. The Fund may close its positions by taking opposite positions
which would operate to terminate the Fund's position in the futures contracts.
Final determinations of variation margin would then be made, additional cash
would be required to be paid by or released to the Fund, and the Fund would
realize a loss or a gain.
Futures contracts may be closed out only on the exchange or board of
trade where the contracts were initially traded. Although the Fund intends to
purchase or sell futures contracts only on exchanges or boards of trade where
there appears to be an active market, there is no assurance that a liquid
market on an exchange or board of trade will exist for any particular contract
at any particular time. In such event, it might not be possible to close a
futures contract, and in the event of adverse price movements, the Fund would
continue to be required to make daily cash payments of variation margin.
However, in the event futures contracts have been used to hedge the underlying
instruments, the Fund would continue to hold the underlying instruments
subject to the hedge until the futures contracts could be terminated. In such
circumstances, an increase in the price of underlying instruments, if any,
might partially or completely offset losses on the futures contract. However,
as described below, there is no guarantee that the price of the underlying
instruments will, in fact, correlate with the price movements in the futures
contract and thus provide an offset to losses on a futures contract.
Hedging Risk. A decision of whether, when, and how to hedge involves
skill and judgment, and even a well-conceived hedge may be unsuccessful to
some degree because of unexpected market behavior, market or interest rate
trends. There are several risks in connection with the use by the Fund of
futures contracts as a hedging device. One risk arises because of the
imperfect correlation between movements in the prices of the futures contracts
and movements in the prices of the underlying instruments which are the
subject of the hedge. T. Rowe Price will, however, attempt to reduce this
risk by entering into futures contracts whose movements, in its judgment, will
have a significant correlation with movements in the prices of the Fund's
underlying instruments sought to be hedged.
Successful use of futures contracts by the Fund for hedging purposes is
also subject to T. Rowe Price's ability to correctly predict movements in the
direction of the market. It is possible that, when the Fund has sold futures
to hedge its portfolio against a decline in the market, the index, indices, or
instruments underlying futures might advance and the value of the underlying
instruments held in the Fund's portfolio might decline. If this were to
occur, the Fund would lose money on the futures and also would experience a
decline in value in its underlying instruments. However, while this might
occur to a certain degree, T. Rowe Price believes that over time the value of
the Fund's portfolio will tend to move in the same direction as the market
indices used to hedge the portfolio. It is also possible that if the Fund
were to hedge against the possibility of a decline in the market (adversely
affecting the underlying instruments held in its portfolio) and prices instead
increased, the Fund would lose part or all of the benefit of increased value
of those underlying instruments that it has hedged, because it would have
offsetting losses in its futures positions. In addition, in such situations,
if the Fund had insufficient cash, it might have to sell underlying
instruments to meet daily variation margin requirements. Such sales of
underlying instruments might be, but would not necessarily be, at increased
PAGE 36
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 T. Rowe Price might not result
in a successful hedging transaction over a very short time period.
Options on Futures Contracts
The Fund may purchase and sell options on the same types of futures in
which it may invest.
Options on futures are similar to options on underlying instruments
except that options on futures give the purchaser the right, in return for the
premium paid, to assume a position in a futures contract (a long position if
the option is a call and a short position if the option is a put), rather than
to purchase or sell the futures contract, at a specified exercise price at any
time during the period of the option. Upon exercise of the option, the
delivery of the futures position by the writer of the option to the holder of
the option will be accompanied by the delivery of the accumulated balance in
the writer's futures margin account which represents the amount by which the
market price of the futures contract, at exercise, exceeds (in the case of a
call) or is less than (in the case of a put) the exercise price of the option
on the futures contract. Purchasers of options who fail to exercise their
options prior to the exercise date suffer a loss of the premium paid.
As an alternative to writing or purchasing call and put options on
interest rate futures, the Fund may write or purchase call and put options on
financial indices. Such options would be used in a manner similar to the use
of options on futures contracts. From time to time, a single order to
purchase or sell futures contracts (or options thereon) may be made on behalf
of the Fund and other T. Rowe Price Funds. Such aggregated orders would be
allocated among the Funds and the other T. Rowe Price Funds in a fair and non-
discriminatory manner.
Special Risks of Transactions in Options on Futures Contracts
The risks described under "Special Risks of Transactions on Futures
Contracts" are substantially the same as the risks of using options on
futures. In addition, where the Fund seeks to close out an option position by
writing or buying an offsetting option covering the same index, underlying
instrument or contract and having the same exercise price and expiration date,
PAGE 37
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 Fund has no current intention of engaging in futures or
options transactions other than those described above, it reserves the right
to do so. Such futures and options trading might involve risks which differ
from those involved in the futures and options described above.
Foreign Futures and Options
Participation in foreign futures and foreign options transactions
involves the execution and clearing of trades on or subject to the rules of a
foreign board of trade. Neither the National Futures Association nor any
domestic exchange regulates activities of any foreign boards of trade,
including the execution, delivery and clearing of transactions, or has the
power to compel enforcement of the rules of a foreign board of trade or any
applicable foreign law. This is true even if the exchange is formally linked
to a domestic market so that a position taken on the market may be liquidated
by a transaction on another market. Moreover, such laws or regulations will
vary depending on the foreign country in which the foreign futures or foreign
options transaction occurs. For these reasons, when the Fund trades foreign
futures or foreign options contracts, it may not be afforded certain of the
protective measures provided by the Commodity Exchange Act, the CFTC's
regulations and the rules of the National Futures Association and any domestic
exchange, including the right to use reparations proceedings before the
Commission and arbitration proceedings provided by the National Futures
Association or any domestic futures exchange. In particular, funds received
from the Fund for foreign futures or foreign options transactions may not be
provided the same protections as funds received in respect of transactions on
United States futures exchanges. In addition, the price of any foreign
futures or foreign options contract and, therefore, the potential profit and
loss thereon may be affected by any variance in the foreign exchange rate
between the time the Fund's order is placed and the time it is liquidated,
offset or exercised.
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PAGE 38
Foreign Currency Transactions
A forward foreign currency exchange contract involves an obligation to
purchase or sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract agreed upon by the parties, at a
price set at the time of the contract. These contracts are principally traded
in the interbank market conducted directly between currency traders (usually
large, commercial banks) and their customers. A forward contract generally
has no deposit requirement, and no commissions are charged at any stage for
trades.
The Fund may enter into forward contracts for a variety of purposes in
connection with the management of the foreign securities portion of its
portfolio. The Fund's use of such contracts would include, but not be limited
to, the following:
First, when the Fund enters into a contract for the purchase or sale of
a security denominated in a foreign currency, it may desire to "lock in" the
U.S. dollar price of the security. By entering into a forward contract for
the purchase or sale, for a fixed amount of dollars, of the amount of foreign
currency involved in the underlying security transactions, the Fund will be
able to protect itself against a possible loss resulting from an adverse
change in the relationship between the U.S. dollar and the subject foreign
currency during the period between the date the security is purchased or sold
and the date on which payment is made or received.
Second, when T. Rowe Price believes that one currency may experience a
substantial movement against another currency, including the U.S. dollar, it
may enter into a forward contract to sell or buy the amount of the former
foreign currency, approximating the value of some or all of the Fund's
portfolio securities denominated in such foreign currency. Alternatively,
where appropriate, the Fund may hedge all or part of its foreign currency
exposure through the use of a basket of currencies or a proxy currency where
such currency or currencies act as an effective proxy for other currencies.
In such a case, the Fund may enter into a forward contract where the amount of
the foreign currency to be sold exceeds the value of the securities
denominated in such currency. The use of this basket hedging technique may be
more efficient and economical than entering into separate forward contracts
for each currency held in the Fund. The precise matching of the forward
contract amounts and the value of the securities involved will not generally
be possible since the future value of such securities in foreign currencies
will change as a consequence of market movements in the value of those
securities between the date the forward contract is entered into and the date
it matures. The projection of short-term currency market movement is
extremely difficult, and the successful execution of a short-term hedging
strategy is highly uncertain. Other than as set forth above, and immediately
below, the Fund will also not enter into such forward contracts or maintain a
net exposure to such contracts where the consummation of the contracts would
obligate the Fund to deliver an amount of foreign currency in excess of the
value of the Fund's portfolio securities or other assets denominated in that
currency. The Fund, however, in order to avoid excess transactions and
transaction costs, may maintain a net exposure to forward contracts in excess
of the value of the Fund's portfolio securities or other assets to which the
forward contracts relate (including accrued interest to the maturity of the
forwards on such securities provided the excess amount is "covered" by liquid,
high-grade debt securities, denominated in any currency, at least equal at all
times to the amount of such excess. For these purposes "the securities or
other assets to which the forward contracts relate" may be securities or
PAGE 39
assets denominated in a single currency, or where proxy forwards are used,
securities denominated in more than one currency). Under normal
circumstances, consideration of the prospect for currency parities will be
incorporated into the longer term investment decisions made with regard to
overall diversification strategies. However, T. Rowe Price believes that it
is important to have the flexibility to enter into such forward contracts when
it determines that the best interests of the Fund will be served.
At the maturity of a forward contract, the Fund may sell the portfolio
security and make delivery of the foreign currency, or it may retain the
security and either extend the maturity of the forward contract (by "rolling"
that contract forward) or may initiate a new forward contract.
As indicated above, it is impossible to forecast with absolute precision
the market value of portfolio securities at the expiration of the forward
contract. Accordingly, it may be necessary for the Fund to purchase
additional foreign currency on the spot market (and bear the expense of such
purchase) if the market value of the security is less than the amount of
foreign currency the Fund is obligated to deliver and if a decision is made to
sell the security and make delivery of the foreign currency. Conversely, it
may be necessary to sell on the spot market some of the foreign currency
received upon the sale of the portfolio security if its market value exceeds
the amount of foreign currency the Fund is obligated to deliver. However, as
noted, in order to avoid excessive transactions and transaction costs, the
Fund may use liquid, high-grade debt securities denominated in any currency,
to cover the amount by which the value of a forward contract exceeds the value
of the securities to which it relates.
If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss (as described below) to the
extent that there has been movement in forward contract prices. If the Fund
engages in an offsetting transaction, it may subsequently enter into a new
forward contract to sell the foreign currency. Should forward prices decline
during the period between the Fund's entering into a forward contract for the
sale of a foreign currency and the date it enters into an offsetting contract
for the purchase of the foreign currency, the Fund will realize a gain to the
extent the price of the currency it has agreed to sell exceeds the price of
the currency it has agreed to purchase. Should forward prices increase, the
Fund will suffer a loss to the extent of the price of the currency it has
agreed to purchase exceeds the price of the currency it has agreed to sell.
The Fund's dealing in forward foreign currency exchange contracts will
generally be limited to the transactions described above. However, the Fund
reserves the right to enter into forward foreign currency contracts for
different purposes and under different circumstances. Of course, the Fund is
not required to enter into forward contracts with regard to its foreign
currency-denominated securities and will not do so unless deemed appropriate
by T. Rowe Price. It also should be realized that this method of hedging
against a decline in the value of a currency does not eliminate fluctuations
in the underlying prices of the securities. It simply establishes a rate of
exchange at a future date. Additionally, although such contracts tend to
minimize the risk of loss due to a decline in the value of the hedged
currency, at the same time, they tend to limit any potential gain which might
result from an increase in the value of that currency.
Although the Fund values its assets daily in terms of U.S. dollars, it
does not intend to convert its holdings of foreign currencies into U.S.
dollars on a daily basis. It will do so from time to time, and investors
PAGE 40
should be aware of the costs of currency conversion. Although foreign
exchange dealers do not charge a fee for conversion, they do realize a profit
based on the difference (the "spread") between the prices at which they are
buying and selling various currencies. Thus, a dealer may offer to sell a
foreign currency to the Fund at one rate, while offering a lesser rate of
exchange should the Fund desire to resell that currency to the dealer.
Federal Tax Treatment of Options, Futures Contracts and Forward Foreign
Exchange Contracts
The Fund may enter into certain option, futures, and forward foreign
exchange contracts, including options and futures on currencies, which will be
treated as Section 1256 contracts or straddles.
Transactions which are considered Section 1256 contracts will be
considered to have been closed at the end of the Fund's fiscal year and any
gains or losses will be recognized for tax purposes at that time. Such gains
or losses from the normal closing or settlement of such transactions will be
characterized as 60% long-term capital gain or loss and 40% short-term capital
gain or loss regardless of the holding period of the instrument. The Fund
will be required to distribute net gains on such transactions to shareholders
even though it may not have closed the transaction and received cash to pay
such distributions.
Options, futures and forward foreign exchange contracts, including
options and futures on currencies, which offset a foreign dollar denominated
bond or currency position may be considered straddles for tax purposes, in
which case a loss on any position in a straddle will be subject to deferral to
the extent of unrealized gain in an offsetting position. The holding period
of the securities or currencies comprising the straddle will be deemed not to
begin until the straddle is terminated. For securities offsetting a purchased
put, this adjustment of the holding period may increase the gain from sales of
securities held less than three months. The holding period of the security
offsetting an "in-the-money qualified covered call" option on an equity
security will not include the period of time the option is outstanding.
Losses on written covered calls and purchased puts on securities,
excluding certain "qualified covered call" options on equity securities, may
be long-term capital loss, if the security covering the option was held for
more than twelve months prior to the writing of the option.
In order for the Fund to continue to qualify for federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income; i.e., dividends,
interest, income derived from loans of securities, and gains from the sale of
securities or currencies. Pending tax regulations could limit the extent that
net gain realized from option, futures or foreign forward exchange contracts
on currencies is qualifying income for purposes of the 90% requirement. In
addition, gains realized on the sale or other disposition of securities,
including option, futures or foreign forward exchange contracts on securities
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
PAGE 41
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 a 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 a 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, a Fund.
Fundamental Policies
As a matter of fundamental policy, the Fund may not:
(1) Borrowing. Borrow money except that the Fund may (i) borrow
for non-leveraging, temporary or emergency purposes and (ii)
engage in reverse repurchase agreements and make other
investments or engage in other transactions, which may
involve a borrowing, in a manner consistent with the Fund's
investment objective and program, provided that the
combination of (i) and (ii) shall not exceed 33 1/3% of the
value of the Fund's total assets (including the amount
borrowed) less liabilities (other than borrowings) or such
other percentage permitted by law. Any borrowings which
come to exceed this amount will be reduced in accordance
with applicable law. The Fund may borrow from banks, other
Price Funds or other persons to the extent permitted by
applicable law;
(2) Commodities. Purchase or sell physical commodities; except
that it may enter into futures contracts and options
thereon;
(3) Industry Concentration. Purchase the securities of any
issuer if, as a result, more than 25% of the value of the
Fund's total assets would be invested in the securities of
issuers having their principal business activities in the
same industry;
(4) Loans. Make loans, although the Fund may (i) lend portfolio
securities and participate in an interfund lending program
with other Price Funds provided that no such loan may be
made if, as a result, the aggregate of such loans would
exceed 33 1/3% of the value of the Fund's total assets;
(ii) purchase money market securities and enter into
repurchase agreements; and (iii) acquire
publicly-distributed or privately-placed debt securities and
purchase debt;
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PAGE 42
(5) Percent Limit on Assets Invested in Any One Issuer.
Purchase a security if, as a result, with respect to 75% of
the value of its total assets, more than 5% of the value of
the Fund's total assets would be invested in the securities
of a single issuer, except securities issued or guaranteed
by the U.S. Government or any of its agencies or
instrumentalities;
(6) Percent Limit on Share Ownership of Any One Issuer.
Purchase a security if, as a result, with respect to 75% of
the value of the Fund's total assets, more than 10% of the
outstanding voting securities of any issuer would be held by
the Fund (other than obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities);
(7) Real Estate. Purchase or sell real estate unless acquired
as a result of ownership of securities or other instruments
(but this shall not prevent the Fund from investing in
securities or other instruments backed by real estate or in
securities of companies engaged in the real estate
business);
(8) Senior Securities. Issue senior securities except in
compliance with the Investment Company Act of 1940; or
(9) Underwriting. Underwrite securities issued by other
persons, except to the extent that the Fund may be deemed to
be an underwriter within the meaning of the Securities Act
of 1933 in connection with the purchase and sale of its
portfolio securities in the ordinary course of pursuing its
investment program.
NOTES
The following notes should be read in connection with the above-
described fundamental policies. The notes are not fundamental
policies.
With respect to investment restrictions (1) and (4), the Fund will
not borrow from or lend to any other Price Fund unless they apply
for and receive an exemptive order from the SEC or the SEC issues
rules permitting such transactions. The Fund has no current
intention of engaging in any such activity and there is no
assurance the SEC would grant any order requested by the Fund or
promulgate any rules allowing the transactions.
With respect to investment restriction (2), the Fund does not
consider currency contracts or hybrid investments to be
commodities.
For purposes of investment restriction (3), U.S., state or local
governments, or related agencies or instrumentalities, are not
considered an industry.
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.
PAGE 43
Operating Policies
As a matter of operating policy, the Fund may not:
(1) Borrowing. The Fund will not purchase additional securities
when money borrowed exceeds 5% of its total assets;
(2) Control of Portfolio Companies. Invest in companies for the
purpose of exercising management or control;
(3) Futures Contracts. Purchase a futures contract or an option
thereon if, with respect to positions in futures or options
on futures which do not represent bona fide hedging, the
aggregate initial margin and premiums on such options would
exceed 5% of the Fund's net asset value;
(4) Illiquid Securities. Purchase illiquid securities and
securities of unseasoned issuers if, as a result, more than
15% of its net assets would be invested in such securities,
provided that the Fund will not invest more than 5% of its
total assets in restricted securities and not more than 5%
in securities of unseasoned issuers. Securities eligible
for resale under Rule 144A of the Securities Act of 1933 are
not included in the 5% limitation but are subject to the 15%
limitation;
(5) Investment Companies. Purchase securities of open-end or
closed-end investment companies except in compliance with
the Investment Company Act of 1940 and applicable state law.
Duplicate fees may result from such purchases;
(6) Margin. Purchase securities on margin, except (i) for use
of short-term credit necessary for clearance of purchases of
portfolio securities and (ii) it may make margin deposits in
connection with futures contracts or other permissible
investments;
(7) Mortgaging. Mortgage, pledge, hypothecate or, in any
manner, transfer any security owned by the Fund as security
for indebtedness except as may be necessary in connection
with permissible borrowings or investments and then such
mortgaging, pledging or hypothecating may not exceed 33 1/3%
of the Fund's total assets at the time of borrowing or
investment;
(8) Oil and Gas Programs. Purchase participations or other
direct interests in or enter into leases with respect to,
oil, gas, or other mineral exploration or development
programs;
(9) Options, Etc. Invest in puts, calls, straddles, spreads, or
any combination thereof, except to the extent permitted by
the prospectus and Statement of Additional Information;
<PAGE>
PAGE 44
(10) Ownership of Portfolio Securities by Officers and
Directors/Trustees. Purchase or retain the securities of
any issuer if, to the knowledge of the Fund's management,
those officers and directors of the Fund, and of its
investment manager, who each owns beneficially more than .5%
of the outstanding securities of such issuer, together own
beneficially more than 5% of such securities;
(11) Short Sales. Effect short sales of securities;
(12) Unseasoned Issuers. Purchase a security (other than
obligations issued or guaranteed by the U.S., any foreign,
state or local government, their agencies or
instrumentalities) if, as a result, more than 5% of the
value of the Fund's total assets would be invested in the
securities of issuers which at the time of purchase had been
in operation for less than three years (for this purpose,
the period of operation of any issuer shall include the
period of operation of any predecessor or unconditional
guarantor of such issuer). This restriction does not apply
to securities of pooled investment vehicles or mortgage or
asset-backed securities; or
(13) Warrants. Invest in warrants if, as a result thereof, more
than 2% of the value of the total assets of the Fund would
be invested in warrants which are not listed on the New York
Stock Exchange, the American Stock Exchange, or a recognized
foreign exchange, or more than 5% of the value of the total
assets of the Fund would be invested in warrants whether or
not so listed. For purposes of these percentage
limitations, the warrants will be valued at the lower of
cost or market and warrants acquired by the Fund in units or
attached to securities may be deemed to be without value.
MANAGEMENT OF FUND
The officers and directors of the Fund are listed below. Unless
otherwise noted, the address of each is 100 East Pratt Street, Baltimore,
Maryland 21202. Except as indicated, each has been an employee of T. Rowe
Price for more than five years. In the list below, the Fund's directors who
are considered "interested persons" of T. Rowe Price 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 its officership, directorship, and/or employment with T. Rowe Price.
*JAMES S. RIEPE, Vice President and Director--Managing Director, T. Rowe
Price; Chairman of the Board, T. Rowe Price Services, Inc., T. Rowe Price
Retirement Plan Services, Inc., and T. Rowe Price Trust Company; President and
Director, T. Rowe Price Investment Services, Inc; Director, Rhone-Poulenc
Rorer, Inc.
VEENA A. KUTLER, President--Vice President, T. Rowe Price and Rowe Price-
Fleming International, Inc.
ROBERT P. CAMPBELL, Vice President--Vice President, T. Rowe Price and Rowe
Price-Fleming International, Inc.; formerly (4/80-5/90) Vice President and
Director, Private Finance, New York Life Insurance Company, New York, New York
CHRISTY M. DIPIETRO, Vice President--Vice President, T. Rowe Price and T. Rowe
Price Trust Company
PAGE 45
HENRY H. HOPKINS, Vice President--Managing Director, T. Rowe Price; Vice
President and Director, T. Rowe Price Investment Services, Inc., T. Rowe Price
Services, Inc., and T. Rowe Price Trust Company; Vice President, Rowe Price-
Fleming International, Inc. and T. Rowe Price Retirement Plan Services, Inc.
JAMES M. MCDONALD, Vice President--Vice President, T. Rowe Price
ROBERT M. RUBINO, Vice President--Vice President, T. Rowe Price
CHARLES P. SMITH, Vice President--Managing Director, T. Rowe Price; Vice
President, Rowe Price-Fleming International, Inc.
EDWARD A. WIESE, Vice President--Vice President, T. Rowe Price, Rowe Price-
Fleming International, Inc. and T. Rowe Price Trust Company
LENORA V. HORNUNG, Secretary--Vice President, T. Rowe Price
CARMEN F. DEYESU, Treasurer--Vice President, T. Rowe Price, T. Rowe Price
Services, Inc., and T. Rowe Price Trust Company
DAVID S. MIDDLETON, Controller--Vice President, T. Rowe Price, T. Rowe Price
Services, Inc., and T. Rowe Price Trust Company
ROGER L. FIERY, Assistant Vice President--Vice President, Rowe Price-Fleming
International, Inc.
EDWARD T. SCHNEIDER, Assistant Vice President--Vice President, T. Rowe Price
Services, Inc.
INGRID I. VORDEMBERGE, Assistant Vice President--Employee, T. Rowe Price
The Fund's Executive Committee, comprised of Mr. Riepe, has been
authorized by its Board of Directors to exercise all powers of the Board to
manage the Fund in the intervals between meetings of the Board, except the
powers prohibited by statute from being delegated.
PRINCIPAL HOLDERS OF SECURITIES
As of the date of the prospectus, the officers and directors of the
Fund, as a group, owned less than 1% of the outstanding shares of the Fund.
INVESTMENT MANAGEMENT SERVICES
Services Provided by T. Rowe Price
Under the Management Agreement with the Corporation relating to the
Fund, T. Rowe Price provides the Fund with discretionary investment services.
Specifically, T. Rowe Price is responsible for supervising and directing the
investments of the Fund in accordance with its investment objectives,
programs, and restrictions as provided in the prospectus and this Statement of
Additional Information. T. Rowe Price is also responsible for effecting all
security transactions on behalf of the Fund, including the allocation of
principal business and portfolio brokerage and the negotiation of commissions.
In addition to these services, T. Rowe Price provides the Fund with certain
corporate administrative services, including: maintaining the Fund's corporate
existence, corporate records, and registering and qualifying the Fund's shares
under federal and state laws; monitoring the financial, accounting, and
administrative functions of the Fund; maintaining liaison with the agents
employed by the Fund such as the Fund's custodian and transfer agent;
assisting the Fund in the coordination of such agents' activities; and
permitting T. Rowe Price's employees to serve as officers, directors, and
committee members of the Fund without cost to the Fund.
The Fund's Management Agreement also provides that T. Rowe Price, its
directors, officers, employees, and certain other persons performing specific
functions for the Fund will only be liable to the Fund for losses resulting
PAGE 46
from willful misfeasance, bad faith, gross negligence, or reckless disregard
of duty.
Management Fee
The Fund pays T. Rowe Price an annual all-inclusive fee (the "Fee") of
0.70%. The Fee is paid monthly to the T. Rowe Price on the first business day
of the next succeeding calendar month and is the sum of the daily Fee accruals
for each month. The daily Fee accrual for any particular day is calculated by
multiplying the fraction of one (1) over the number of calendar days in the
year by the appropriate Fee rate and multiplying this product by the net
assets of the Fund for that day as determined in accordance with the Fund's
prospectus as of the close of business from the previous business day on which
the Fund was open for business.
The Management Agreement between the Fund and T. Rowe Price provides
that T. Rowe Price will pay all expenses of the Fund's operations, except
interest, taxes, brokerage commissions and other charges incident to the
purchase, sale or lending of the Fund's portfolio securities, directors' fees
and expenses (including counsel fees and expenses) and such nonrecurring or
extraordinary expenses that may arise, including the costs of actions, suits,
or proceedings to which the Fund is a party and the expenses the Fund may
incur as a result of its obligation to provide indemnification to its
officers, directors and agents. However, the Board of Directors of the Fund
reserves the right to impose additional fees against shareholder accounts to
defray expenses which would otherwise be paid by T. Rowe Price under the
Management Agreement. The Board does not anticipate levying such charges;
such a fee, if charged, may be retained by the Fund or paid to T. Rowe Price.
DISTRIBUTOR FOR FUND
T. Rowe Price Investment Services, Inc. ("Investment Services"), a
Maryland corporation formed in 1980 as a wholly-owned subsidiary of T. Rowe
Price, serves as the distributor of the Fund. Investment Services is
registered as a broker-dealer under the Securities Exchange Act of 1934 and is
a member of the National Association of Securities Dealers, Inc. The offering
of the Fund's shares is continuous.
Investment Services is located at the same address as the Fund and T.
Rowe Price -- 100 East Pratt Street, Baltimore, Maryland 21202.
Investment Services serves as distributor to the Fund pursuant to
individual Underwriting Agreements ("Underwriting Agreements"), which provide
that Investment Services will pay all fees and expenses in connection with:
registering and qualifying the Fund's shares under the various state "blue
sky" laws; preparing, setting in type, printing, and mailing its prospectuses
and reports to shareholders; issuing its shares, including expenses of
confirming purchase orders; printing and distributing prospectuses and reports
for use in offering and selling shares for the Fund; preparing, setting in
type, printing, and mailing all sales literature and advertising; Investment
Services' federal and state registrations as a broker-dealer; and offering and
selling shares for the Fund. The Underwriting Agreements provide that the
Fund is responsible for interest, taxes 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 Investment Services.
Investment Services' expenses are paid by T. Rowe Price.
PAGE 47
Investment Services acts as the agent of the Fund in connection with the
sale of its shares in all states in which the shares are qualified and in
which Investment Services is qualified as a broker-dealer. Under the
Underwriting Agreement, Investment Services accepts orders for Fund shares at
net asset value. No sales charges are paid by investors or the Fund.
CUSTODIAN
State Street Bank and Trust Company is the custodian for the Fund's
securities and cash, but it does not participate in the Fund's investment
decisions. Portfolio securities purchased in the U.S. are maintained in the
custody of the Bank and may be entered into the Federal Reserve Book Entry
System, or the security depository system of the Depository Trust Corporation.
The Bank and the Fund have entered into a Custodian Agreement with The Chase
Manhattan Bank, N.A., London, pursuant to which portfolio securities which are
purchased outside the United States are maintained in the custody of various
foreign branches of The Chase Manhattan Bank and such other custodians,
including foreign banks and foreign securities depositories as are approved by
the Fund's Board of Directors in accordance with regulations under the
Investment Company Act of 1940. The Bank's main office is at 225 Franklin
Street, Boston, Massachusetts 02110. The address for The Chase Manhattan
Bank, N.A., London is Woolgate House, Coleman Street, London, EC2P 2HD,
England.
PORTFOLIO TRANSACTIONS
Investment or Brokerage Discretion
Decisions with respect to the purchase and sale of portfolio securities
on behalf of the Fund is 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.
The Fund's purchases and sales of 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 a Fund. However, it is included because T. Rowe Price does manage a
significant number of common stock portfolios which do engage in agency
transactions and pay commissions and because some research and services
resulting from the payment of such commissions may benefit the Fund.
How Brokers and Dealers are Selected
Fixed Income Securities
Fixed income securities are generally purchased from the issuer or a
primary market-maker acting as principal for the securities on a net basis,
with no brokerage commission being paid by the client, although the price
usually includes an undisclosed compensation. Transactions placed through
dealers serving as primary market-makers reflect the spread between the bid
and asked prices. Securities may also be purchased from underwriters at
prices which include underwriting fees.
T. Rowe Price may effect principal transactions on behalf of a Fund with
a broker or dealer who furnishes brokerage and/or research services, designate
PAGE 48
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 Fund may receive
brokerage and research services in connection with such designations in fixed
priced 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 broker-dealers 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
broker-dealers.
PAGE 49
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 to generate all of the information presently provided by brokers
and dealers. T. Rowe Price pays cash for certain research services received
from external sources. T. Rowe Price also allocates brokerage for research
services which are available for cash. While receipt of research services
from brokerage firms has not reduced T. Rowe Price's normal research
activities, the expenses of T. Rowe Price could be materially increased if it
attempted to generate such additional information through its own staff. To
the extent that research services of value are provided by brokers or dealers,
T. Rowe Price may be relieved of expenses which it might otherwise bear.
T. Rowe Price has a policy of not allocating brokerage business in
return for products or services other than brokerage or research services. In
accordance with the provisions of Section 28(e) of the Securities Exchange Act
of 1934, T. Rowe Price may from time to time receive services and products
which serve both research and non-research functions. In such event, T. Rowe
Price makes a good faith determination of the anticipated research and non-
research use of the product or service and allocates brokerage only with
respect to the research component.
Commissions to Brokers who Furnish Research Services
Certain brokers and dealers who provide quality brokerage and execution
services also furnish research services to T. Rowe Price. With regard to the
payment of brokerage commissions, T. Rowe Price has adopted a brokerage
allocation policy embodying the concepts of Section 28(e) of the Securities
Exchange Act of 1934, which permits an investment adviser to cause an account
to pay commission rates in excess of those another broker or dealer would have
charged for effecting the same transaction, if the adviser determines in good
faith that the commission paid is reasonable in relation to the value of the
brokerage and research services provided. The determination may be viewed in
terms of either the particular transaction involved or the overall
responsibilities of the adviser with respect to the accounts over which it
exercises investment discretion. Accordingly, while T. Rowe Price cannot
readily determine the extent to which commission rates charged by broker-
dealers reflect the value of its 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 Fund
participates.
Internal Allocation Procedures
T. Rowe Price has a policy of not precommitting a specific amount of
business to any broker or dealer over any specific time period. Historically,
the majority of brokerage placement has been determined by the needs of a
specific transaction such as market-making, availability of a buyer or seller
of a particular security, or specialized execution skills. However, T. Rowe
Price does have an internal brokerage allocation procedure for that portion of
its discretionary client brokerage or selling concessions 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.
PAGE 50
Each year, T. Rowe Price assesses the contribution of the brokerage and
research services provided by brokers and dealers, and attempts to allocate a
portion of its brokerage and selling concession business in response to these
assessments. Research analysts, counselors, various investment committees,
and the Trading Department each seek to evaluate the brokerage and research
services they receive from brokers and dealers and make judgments as to the
level of business which would recognize such services. In addition, brokers
and dealers sometimes suggest a level of business they would like to receive
in return for the various brokerage and research services they provide.
Actual business received by any firm may be less than the suggested
allocations but can, and often does, exceed the suggestions, because the total
business is allocated on the basis of all the considerations described above.
In no case is a broker or dealer excluded from receiving business from T. Rowe
Price because it has not been identified as providing research services.
Miscellaneous
T. Rowe Price's brokerage allocation policy is consistently applied to
all its fully discretionary accounts, which represent a substantial majority
of all assets under management. Research services furnished by brokers or
dealers through which T. Rowe Price effects securities transactions may be
used in servicing all accounts (including non-Fund accounts) managed by T.
Rowe Price. Conversely, research services received from brokers or dealers
which execute transactions for the Fund is not necessarily used by T. Rowe
Price exclusively in connection with the management of the Fund.
From time to time, orders for clients may be placed through a
computerized transaction network.
The Fund does not allocate business to any broker-dealer on the basis of
its sales of the Fund's shares. However, this does not mean that broker-
dealers who purchase Fund shares for its clients will not receive business
from the Fund.
Some of T. Rowe Price's other clients have investment objectives and
programs similar to those of the Fund. T. Rowe Price may occasionally make
recommendations to other clients which result in its purchasing or selling
securities simultaneously with the Fund. As a result, the demand for
securities being purchased or the supply of securities being sold may
increase, and this could have an adverse effect on the price of those
securities. It is T. Rowe Price's policy not to favor one client over another
in making recommendations or in placing orders. T. Rowe Price frequently
follows the practice of grouping orders of various clients for execution which
generally results in lower commission rates being attained. In certain cases,
where the aggregate order is executed in a series of transactions at various
prices on a given day, each participating client's proportionate share of such
order reflects the average price paid or received with respect to the total
order. T. Rowe Price has established a general investment policy that it will
ordinarily not make additional purchases of a common stock of a company for
its clients (including the T. Rowe Price Funds) if, as a result of such
purchases, 10% or more of the outstanding common stock of such company would
be held by its clients in the aggregate.
To the extent possible, T. Rowe Price intends to recapture solicitation
fees paid in connection with tender offers through T. Rowe Price Investment
Services, Inc., the Fund's distributor. At the present time, T. Rowe Price
does not recapture commissions or underwriting discounts or selling group
concessions in connection with taxable securities acquired in underwritten
PAGE 51
offerings. T. Rowe Price does, however, attempt to negotiate elimination of
all or a portion of the selling-group concession or underwriting discount when
purchasing tax-exempt municipal securities on behalf of its clients in
underwritten offerings.
Transactions with Related Brokers and Dealers
As provided in the Investment Management Agreement between the Fund and
T. Rowe Price, T. Rowe Price is responsible not only for making decisions with
respect to the purchase and sale of the Fund's portfolio securities, but also
for implementing these decisions, including the negotiation of commissions and
the allocation of portfolio brokerage and principal business. It is expected
that T. Rowe Price may place orders for the Fund's portfolio transactions with
broker-dealers through the same trading desk T. Rowe Price uses for portfolio
transactions in domestic securities. The trading desk accesses brokers and
dealers in various markets in which the Fund's foreign securities are located.
These brokers and dealers may include of certain affiliates of Robert Fleming
Holdings Limited ("Robert Fleming Holdings") and Jardine Fleming Group Limited
("JFG"), persons indirectly related to T. Rowe Price. Robert Fleming
Holdings, through Copthall Overseas Limited, a wholly-owned subsidiary, owns
25% of the common stock of Rowe Price-Fleming International, Inc. ("RPFI"), an
investment adviser registered under the Investment Advisers Act of 1940.
Fifty percent of the common stock of RPFI is owned by TRP Finance, Inc., a
wholly-owned subsidiary of T. Rowe Price, and the remaining 25% is owned by
Jardine Fleming International Holdings Limited, a subsidiary of JFG. JFG is
50% owned by Robert Fleming Holdings and 50% owned by Jardine Matheson
Holdings Limited. Orders for the Fund's portfolio transactions placed with
affiliates of Robert Fleming Holdings and JFG will result in commissions being
received by such affiliates.
The Board of Directors of the Fund has authorized T. Rowe Price to
utilize certain affiliates of Robert Fleming and JFG in the capacity of broker
in connection with the execution of the Fund's portfolio transactions. These
affiliates include, but are not limited to, Jardine Fleming (Securities)
Limited ("JFS"), a wholly-owned subsidiary of JFG, Robert Fleming & Co.
Limited ("RF&Co."), Jardine Fleming Australia Securities Limited, and Robert
Fleming, Inc. (a New York brokerage firm). Other affiliates of Robert Fleming
Holdings and JFG also may be used. Although it does not believe that the
Fund's use of these brokers would be subject to Section 17(e) of the
Investment Company Act of 1940, the Board of Directors of the Fund has agreed
that the procedures set forth in Rule 17(e)(1) under that Act will be followed
when using such brokers.
PRICING OF SECURITIES
Fixed income securities are generally traded in the over-the-counter
market. Investments in domestic securities with remaining maturities of one
year or more and foreign securities are stated at fair value using bid-side
valuation as furnished by dealers who make markets in such securities or by an
independent pricing service, which considers yield or price of bonds of
comparable quality, coupon, maturity, and type, as well as prices quoted by
dealers who make markets in such securities. Domestic securities with
remaining maturities less than one year are stated at fair value which is
determined by using a matrix system that establishes a value for each security
based on bid-side money market yields.
<PAGE>
PAGE 52
There are a number of pricing services available, and the Board of
Directors, on the basis of an ongoing evaluation of these services, may use or
may discontinue the use of any pricing service in whole or in part.
For the purposes of determining a Fund's net asset value per share, all
assets and liabilities initially expressed in foreign currencies are converted
into U.S. dollars at the mean of the bid and offer prices of such currencies
against U.S. dollars quoted by any major bank.
Assets and liabilities for which the above valuation procedures are
inappropriate or are deemed not to reflect fair value are stated at fair
value, as determined in good faith by or under the supervision of officers of
the Fund as authorized by its Board of Directors.
NET ASSET VALUE PER SHARE
The purchase and redemption price of the Fund's shares is equal to the
Fund's net asset value per share or share price. The Fund determines its net
asset value per share by subtracting the Fund's liabilities (including accrued
expenses and dividends payable) from its total assets (the market value of the
securities the Fund holds plus cash and other assets, including income accrued
but not yet received) and dividing the result by the total number of shares
outstanding. The net asset value per share of the Fund is calculated as of
the close of trading on the New York Stock Exchange ("NYSE") every day the
NYSE is open for trading. The net asset value of the Money Fund is also
calculated as of 12:00 noon (Eastern time) 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 a 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 a Fund of securities owned by it is
not reasonably practicable or it is not reasonably practicable for the Fund
fairly to determine the value of its net assets, or (d) during which a
governmental body having jurisdiction over the Fund may by order permit such a
suspension for the protection of the Fund's shareholders; provided that
applicable rules and regulations of the Securities and Exchange Commission (or
any succeeding governmental authority) shall govern as to whether the
conditions prescribed in (b), (c), or (d) exist.
DIVIDENDS
Unless the separate account elects otherwise, the Fund's annual capital
gain distributions, 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
The Fund intends to qualify as a "regulated investment company" under
Subchapter M of the Internal Revenue Code of 1986, as amended ("Code") and
PAGE 53
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 the separate account 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.
Income received by the Fund from sources within various foreign
countries may be subject to foreign income taxes withheld at the source.
Under the Code, if more than 50% of the value of a Fund's total assets at the
close of its taxable year comprise securities issued by foreign corporations,
the Fund may file an election with the Internal Revenue Service to "pass
through" to the Fund's shareholders the amount of any foreign income taxes
paid by the Fund. Pursuant to this election, shareholders will be required
to: (i) include in gross income, even though not actually received, their
respective pro rata share of foreign taxes paid by the Fund; (ii) treat their
pro rata share of foreign taxes as paid by them; and (iii) either deduct their
pro rata share of foreign taxes in computing their taxable income, or use it
as a foreign tax credit against U.S. income taxes (but not both).
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
separate account shareholders (regardless of whether they would otherwise have
been considered capital gain dividends), and (iii) the separate accounts
investing in the Fund may fail to satisfy the requirements of Code Section
817(h) which in turn could adversely affect the tax status of life insurance
and annuity contracts with premiums invested in the affected separate
accounts.
To the extent the Fund invests in foreign securities, the following
would apply:
Foreign Currency Gains and Losses
Foreign currency gains and losses, including the portion of gain or loss
on the sale of debt securities attributable to foreign exchange rate
fluctuations, are ordinary income for tax purposes. If the net effect of
PAGE 54
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.
YIELD INFORMATION
From time to time, the Fund may advertise a yield figure calculated in
the following manner:
An income factor is calculated for each security in the portfolio based
upon the security's market value at the beginning of the period and yield as
determined in conformity with regulation of the Securities and Exchange
Commission. The income factors are then totalled for all securities in the
portfolio. Next, expenses of the Fund for the period net of expected
reimbursement are deducted from the income to arrive at net income, which is
then converted to a per-share amount by dividing net income by the average
number of shares outstanding during the period. The net income per share is
divided by the net asset value on the last day of the period to produce a
monthly yield which is then annualized. Quoted yield factors are for
comparison purposes only, and are not intended to indicate future performance
or forecast the dividend per share of the Fund.
INVESTMENT PERFORMANCE
Total Return Performance
The Fund's calculation of total return performance includes the
reinvestment of all capital gain distributions and income dividends for the
period or periods indicated, without regard to tax consequences to a
shareholder in the Fund. Total return is calculated as the percentage change
between the beginning value of a static account in the Fund and the ending
value of that account measured by the then current net asset value, including
all shares acquired through reinvestment of income and capital gains
dividends. The results shown are historical and should not be considered
indicative of the future performance of a Fund. Each average annual compound
rate of return is derived from the cumulative performance of the Fund over the
time period specified. The annual compound rate of return for the Fund over
any other period of time will vary from the average.
From time to time, in reports and promotional literature, one or more of
the T. Rowe Price funds, including this Fund, may compare its performance to
Overnight Government Repurchase Agreements, Treasury bills, notes, and bonds,
certificates of deposit, and money market deposit accounts. Performance may
also be compared to (1) indices of broad groups of managed and unmanaged
securities considered to be representative of or similar to Fund portfolio
holdings; (2) other mutual funds; or (3) other measures of performance set
forth in publications such as:
Advertising News Service, Inc., "Bank Rate Monitor+ - The Weekly
Financial Rate Reporter" is a weekly publication which lists the yields
on various money market instruments offered to the public by 100 leading
banks and thrift institutions in the U.S., including loan rates offered
by these banks. Bank certificates of deposit differ from mutual funds
in several ways: the interest rate established by the sponsoring bank
PAGE 55
is fixed for the term of a CD; there are penalties for early withdrawal
from CDs; and the principal on a CD is insured.
Donoghue Organization, Inc., "Donoghue's Money Fund Report" is a weekly
publication which tracks net assets, yield, maturity and portfolio
holdings on approximately 380 money market mutual funds offered in the
U.S. These funds are broken down into various categories such as U.S.
Treasury, Domestic Prime and Euros, Domestic Prime and Euros and
Yankees, and Aggressive.
First Boston High Yield Index. It shows statistics on the Composite
Index and analytical data on new issues in the marketplace and low-grade
issuers.
Lipper Analytical Services, Inc., "Lipper-Fixed Income Fund Performance
Analysis" is a monthly publication which tracks net assets, total
return, principal return and yield on over 1900 fixed income mutual
funds offered in the United States.
Merrill Lynch, Pierce, Fenner & Smith, Inc., "Taxable Bond Indices" is a
monthly publication which lists principal, coupon and total return on
over 100 different taxable bond indices tracked by Merrill Lynch,
together with the par weighted characteristics of each Index.
Morningstar, Inc. - is a widely used independent research firm which
rates mutual funds by overall performance, investment objectives, and
assets.
Salomon Brothers Inc., "Analytical Record of Yields and Yield Spreads"
is a publication which tracks historical yields and yield spreads on
short-term market rates, public obligations of the U.S. Treasury and
agencies of the U.S. Government, public corporate debt obligations,
municipal debt obligations and preferred stocks.
Salomon Brothers Inc., "Bond Market Round-up" is a weekly publication
which tracks the yields and yield spreads on a large, but select, group
of money market instruments, public corporate debt obligations, and
public obligations of the U.S. Treasury and agencies of the U.S.
Government.
Salomon Brothers Inc., "Market Performance" - a monthly publication
which tracks principal return, total return and yield on the Salomon
Brothers Broad investment - Grade Bond Index and the components of the
Index as well as some money market instruments not included in the
index.
Shearson Lehman Brothers, Inc., "The Bond Market Report" - a monthly
publication which tracks principal, coupon and total return on the
Shearson Lehman Govt./Corp. Index and Shearson Lehman Aggregate Bond
Index, as well as all the components of these Indices.
Telerate Systems, Inc., a market data distribution network computer
system which tracks a broad range of financial markets including, the
daily rates on money market instruments, public corporate debt
obligations and public obligations of the U.S. Treasury and agencies of
the U.S. Government.
<PAGE>
PAGE 56
Wall Street Journal, is a national daily financial news publication
which lists the yields and current market values on money market
instruments, public corporate debt obligations, public obligations of
the U.S. Treasury and agencies of the U.S. Government as well as common
stocks, preferred stocks, convertible preferred stocks, options and
commodities; in addition to indices prepared by the research departments
of such financial organizations as Shearson Lehman/American Express
Inc., and Merrill Lynch, Pierce, Fenner and Smith, Inc., including
information provided by the Federal Reserve Board.
Performance rankings and ratings reported periodically in national
financial publications such as MONEY, FORBES, BUSINESS WEEK, BARRON'S, etc.
will also be used.
Benefits of Investing in High-Quality Bond Funds
o Higher Income
Bonds have generally provided a higher income than money market
securities because yield usually increased with longer maturities. For
instance, the yield on the 30-year Treasury bond usually exceeds the
yield on the 1-year Treasury bill or 5-year Treasury note. However,
securities with longer maturities fluctuate more in price than those
with shorter maturities. Therefore, the investor must weigh the
advantages of higher yields against the possibility of greater
fluctuation in the principal value of your investment.
o Income Compounding
Investing in bond mutual funds allows investors to benefit from easy and
convenient compounding because you can automatically reinvest monthly
dividends in additional fund shares. Each month investors earn interest
on a larger number of shares. Also, reinvesting dividends removes the
temptation to spend the income.
o Broad Diversification
Each share of a mutual fund represents an interest in a large pool of
securities, so even a small investment is broadly diversified by
maturity. Since most bonds trade efficiently only in very large blocks,
mutual funds provide a degree of diversification that may be difficult
for individual investors to achieve on its own.
o Lower Portfolio Volatility
Investing a portion of one's assets in longer term, high-quality bonds
can help smooth out the fluctuations in your overall investment results,
because bond prices do not necessarily move with stock prices. Also,
bonds usually have higher income yields than stocks, thus increasing the
total income component of your portfolio. This strategy should also add
stability to overall results, as income is always a positive component
of total return.
o Liquidity
A bond fund can supplement a money market fund or bank account as a
source of capital for unexpected contingencies. T. Rowe Price fixed-
income funds offer you easy access to money through free checkwriting
PAGE 57
and convenient redemption and exchange features. Of course, the value
of a bond fund's shares redeemed through checkwriting may be worth more
or less than its value at the time of its original purchase.
Suitability
High-quality bond funds are most suitable for the following objectives:
obtaining a higher current income with minimal credit risk; compounding
of income over time; or diversifying overall investments to reduce
volatility.
IRAs
An IRA is a long-term investment whose objective is to accumulate
personal savings for retirement. Due to the long-term nature of the
investment, even slight differences in performance will result in
significantly different assets at retirement. Mutual funds, with its
diversity of choice, can be used for IRA investments. Generally, individuals
may need to adjust its underlying IRA investments as its time to retirement
and tolerance for risk changes.
Other Features and Benefits
The Fund is a member of the T. Rowe Price Family of Funds and may help
investors achieve various long-term investment goals, such as investing money
for retirement, saving for a down payment on a home, or paying college costs.
To explain how the Fund could be used to assist investors in planning for
these goals and to illustrate basic principles of investing, various
worksheets and guides prepared by T. Rowe Price Associates, Inc. and/or T.
Rowe Price Investment Services, Inc. may be made available. These currently
include: the Asset Mix Worksheet which is designed to show shareholders how to
reduce its investment risk by developing a diversified investment plan: the
College Planning Guide which discusses various aspects of financial planning
to meet college expenses and assists parents in projecting the costs of a
college education for its children; the Retirement Planning Kit (also
available in a PC version) which includes a detailed workbook to determine how
much money you may need for retirement and suggests how you might invest to
reach your goal; and the Retirees Financial Guide which includes a detailed
workbook to determine how much money you can afford to spend and still
preserve your purchasing power and suggest how you might invest to reach your
goal. From time to time, other worksheets and guides may be made available as
well. Of course, an investment in the Fund cannot guarantee that such goals
will be met.
To assist investors in understanding the different returns and risk
characteristics of various investments, the aforementioned guides will include
presentation of historical returns of various investments using published
indices. An example of this is shown on the next page.
<PAGE>
PAGE 58
Historical Returns for Different Investments
Annualized returns for periods ended 12/31/93
50 years 20 years 10 years 5 years
Small-Company Stocks 15.3% 18.8% 10.0% 13.3%
Large-Company Stocks 12.3 12.8 14.9 14.5
Foreign Stocks N/A 14.4 17.9 2.3
Long-Term Corporate Bonds 5.6 10.2 14.0 13.0
Intermediate-Term U.S.
Gov't. Bonds 5.7 9.8 11.4 11.3
Treasury Bills 4.6 7.5 6.4 5.6
U.S. Inflation 4.3 5.9 3.7 3.9
Sources: Ibbotson Associates, Morgan Stanley. Foreign stocks reflect
performance of The Morgan Stanley Capital International EAFE Index, which
includes some 1,000 companies representing the stock markets of Europe,
Australia, New Zealand, and the Far East. This chart is for illustrative
purposes only and should not be considered as performance for, or the
annualized return of, any T. Rowe Price Fund. Past performance does not
guarantee future results.
Also included will be various portfolios demonstrating how these
historical indices would have performed in various combinations over a
specified time period in terms of return. An example of this is shown below.
Performance of Retirement Portfolios*
Asset Mix Average Annualized Value
Returns 20 Years of
Ended 12/31/93 $10,000
Investment
After Period
_____________________ ______________________ ____________
Nominal Real Best Worst
Portfolio Growth Income Safety Return Return** Year Year
I. Low
Risk 40% 40% 20% 11.3% 5.4% 24.9% -9.3%$ 79,775
II. Moderate
Risk 60% 30% 10% 12.1% 6.2% 29.1% -15.6%$ 90,248
III. High
Risk 80% 20% 0% 12.9% 7.0% 33.4% -21.9%$100,031
Source: T. Rowe Price Associates; data supplied by Lehman Brothers, Wilshire
Associates, and Ibbotson Associates.
PAGE 59
* Based on actual performance for the 20 years ended 1993 of stocks (85%
Wilshire 5000 and 15% Europe, Australia, Far East [EAFE] Index), bonds
(Lehman Brothers Aggregate Bond Index from 1976-93 and Lehman Brothers
Government/Corporate Bond Index from 1974-75), and 30-day Treasury bills
from January 1974 through December 1993. Past performance does not
guarantee future results. Figures include changes in principal value and
reinvested dividends and assume the same asset mix is maintained each
year. This exhibit is for illustrative purposes only and is not
representative of the performance of any T. Rowe Price fund.
** Based on inflation rate of 5.9% for the 20-year period ended 12/31/93.
Redemptions in Kind
In the unlikely event a shareholder of the 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 United States or international exchange or market; and (d) are not
illiquid.
CAPITAL STOCK
The Charter of the T. Rowe Price Fixed Income Series, Inc. (the
"Corporation") authorizes its Board of Directors to classify and reclassify
any and all shares which are then unissued, including unissued shares of
capital stock into any number of classes or series, each class or series
consisting of such number of shares and having such designations, such powers,
preferences, rights, qualifications, limitations, and restrictions, as shall
be determined by the Board subject to the Investment Company Act and other
applicable law. The shares of any such additional classes or series might
therefore differ from the shares of the present class and series of capital
stock and from each other as to preferences, conversions or other rights,
voting powers, restrictions, limitations as to dividends, qualifications or
terms or conditions of redemption, subject to applicable law, and might thus
be superior or inferior to the capital stock or to other classes or series in
various characteristics. The Corporation's Board of Directors may increase or
decrease the aggregate number of shares of stock or the number of shares of
stock of any class or series that the Fund has authorized to issue without
shareholder approval.
Except to the extent that the Corporation's Board of Directors might
provide by resolution that holders of shares of a particular class are
entitled to vote as a class on specified matters presented for a vote of the
holders of all shares entitled to vote on such matters, there would be no
right of class vote unless and to the extent that such a right might be
construed to exist under Maryland law. The Charter contains no provision
entitling the holders of the present class of capital stock to a vote as a
class on any matter. Accordingly, the preferences, rights, and other
PAGE 60
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.
Shareholders are entitled to one vote for each full share held (and
fractional votes for fractional shares held) and will vote in the election of
or removal of directors (to the extent hereinafter provided) and on other
matters submitted to the vote of shareholders. There will normally be no
meetings of shareholders for the purpose of electing directors unless and
until such time as less than a majority of the directors holding office have
been elected by shareholders, at which time the directors then in office will
call a shareholders' meeting for the election of directors. Except as set
forth above, the directors shall continue to hold office and may appoint
successor directors. Voting rights are not cumulative, so that the holders of
more than 50% of the shares voting in the election of directors can, if they
choose to do so, elect all the directors of the Fund, in which event the
holders of the remaining shares will be unable to elect any person as a
director. As set forth in the By-Laws of the Corporation, a special meeting
of shareholders of the Corporation shall be called by the Secretary of the
Corporation on the written request of shareholders entitled to cast at least
10% of all the votes of the Corporation entitled to be cast at such meeting.
Shareholders requesting such a meeting must pay to the Corporation the
reasonably estimated costs of preparing and mailing the notice of the meeting.
The Corporation, however, will otherwise assist the shareholders seeking to
hold the special meeting in communicating to the other shareholders of the
Corporation to the extent required by Section 16(c) of the Investment Company
Act of 1940.
FEDERAL AND STATE REGISTRATION OF SHARES
The Fund's shares are registered for sale under the Securities Act of
1933, and the Fund or its shares are registered under the laws of all states
which require registration, as well as the District of Columbia and Puerto
Rico.
LEGAL COUNSEL
Shereff, Friedman, Hoffman, & Goodman, whose address is 919 Third Avenue,
New York, New York 10022, is legal counsel to the Fund.
INDEPENDENT ACCOUNTANTS
___________________, _____________________________, Baltimore, Maryland
21202, are independent accountants to the Fund. The Statement of Assets and
Liabilities of the Fund as of ________________, 1994, included in the
Statement of Additional Information has been so included in reliance on the
report of ________________, given on the authority of said firm as experts in
auditing and accounting.
<PAGE>
PAGE 61
RATINGS OF COMMERCIAL PAPER
Moody's Investors Service, Inc. The rating of Prime-1 is the highest
commercial paper rating assigned by Moody's. Among the factors considered by
Moody's in assigning ratings are the following: valuation of the management
of the issuer; economic evaluation of the issuer's industry or industries and
an appraisal of speculative-type risks which may be inherent in certain areas;
evaluation of the issuer's products in relation to competition and customer
acceptance; liquidity; amount and quality of long-term debt; trend of earnings
over a period of 10 years; financial strength of the parent company and the
relationships which exist with the issuer; and recognition by the management
of obligations which may be present or may arise as a result of public
interest questions and preparations to meet such obligations. These factors
are all considered in determining whether the commercial paper is rated P1,
P2, or P3.
Standard & Poor's Corporation. Commercial paper rated A (highest quality) by
S&P has the following characteristics: liquidity ratios are adequate to meet
cash requirements; long-term senior debt is rated "A" or better, although in
some cases "BBB" credits may be allowed. The issuer has access to at least
two additional channels of borrowing. Basic earnings and cash flow have an
upward trend with allowance made for unusual circumstances. Typically, the
issuer's industry is well established and the issuer has a strong position
within the industry. The reliability and quality of management are
unquestioned. The relative strength or weakness of the above factors
determines whether the issuer's commercial paper is rated A1, A2, or A3.
Fitch Investors Service, Inc.: Fitch 1 - Highest grade. Commercial paper
assigned this rating is regarded as having the strongest degree of assurance
for timely payment. Fitch 2 - Very good grade. Issues assigned this rating
reflect an assurance of timely payment only slightly less in degree than the
strongest issues.
RATINGS OF CORPORATE DEBT SECURITIES
Moody's Investors Service, Inc.
Aaa - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk.
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: its future 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
PAGE 62
good and bad times over the future. Uncertainty of position characterize
bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments of or maintenance of other terms
of the contract over any long period of time may be small.
Caa - Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca - Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked short-comings.
Standard & Poor's Corporation
AAA - This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity
to pay principal and interest is very strong.
A - Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds
in this category than for bonds in the A category.
BB, B, 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 in accordance with the terms of the obligation.
BB indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
Fitch Investors Service, Inc.: AAA - High grade, broadly marketable, suitable
for investment by 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 are often factors, while
guarantee or assumption by parties other than the original debtor may
influence its rating. AA - Of safety virtually beyond question and readily
salable. Their merits are not greatly unlike those of "AAA" class but a bond
so rated may be junior though of strong lien, or the margin of safety is less
strikingly broad. The issue may be the obligation of a small company,
strongly secured, but influenced as to rating by the lesser financial power of
the enterprise and more local type of market.
<PAGE>
PAGE 63
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements. A Statement of Assets and Liabilities of
Registrant as of _______, 1994, appears in the Statement of
Additional Information. Such Statement has been examined by
_________, independent accountants, and has been included in the
Statement of Additional Information in reliance on the report of
such accountants appearing in the Statement of Additional
Information given upon their authority as experts in auditing and
account.+ All other financial statements, schedules and historical
information have been omitted as the subject matter is not required,
not present, or not present in amounts sufficient to require
submission.
(b) Exhibits.
(1) Articles of Incorporation of Registrant, dated March 15, 1994
(2) By-Laws of Registrant
(3) Inapplicable
(4) See Article SIXTH, Capital Stock, Paragraphs (b)-(g) of the
Articles of Incorporation, Article II, Shareholders, Sections
2.01-2.11 and Article VIII, Capital Stock, Sections 8.01-8.07
of the Bylaws filed as Exhibits to this Registration Statement.
(5) Investment Management Agreement between Registrant, on behalf
of T. Rowe Price Limited-Term Bond Portfolio, and T. Rowe Price
Associates, Inc. (to be filed by amendment)
(6) Underwriting Agreement between Registrant, on behalf of T. Rowe
Price Limited-Term Bond Portfolio, and T. Rowe Price Investment
Services, Inc. (to be filed by amendment)
(7) Inapplicable
(8)(a) Custodian Agreement between T. Rowe Price Funds and State
Street Bank and Trust Company, dated September 28, 1987, as
amended to June 24, 1988, October 19, 1988, February 22,
1989, July 19, 1989, September 15, 1989, December 15, 1989,
December 20, 1989, January 25, 1990, February 21, 1990, June
12, 1990, July 18, 1990, October 15, 1990, February 13,
1991, March 6, 1991, September 12, 1991, November 6, 1991,
April 23, 1992, September 2, 1992, November 3, 1992,
December 16, 1992, December 21, 1992, January 28, 1993,
April 22, 1993, September 16, 1993, and November 3, 1993 (to
be filed by amendment)
+Omitted from Registration Statement as initially filed since
Registrant has no assets or liabilities and has never had any assets
or liabilities. Registrant proposes to raise its minimum capital
through an initial private offering of shares at $______ per share.
PAGE 64
(8)(b) Subcustodian Agreement between Registrant on behalf of T.
Rowe Price Limited-Term Bond Portfolio, and State Street
Bank and Trust Company and the Chase Manhattan Bank, N.A.
(to be filed by amendment)
(9)(a) Transfer Agency and Service Agreement between T. Rowe Price
Services, Inc. and T. Rowe Price Funds, dated January 1,
1994 (to be filed by amendment)
(9)(b) Agreement between T. Rowe Price Associates, Inc. and T. Rowe
Price Funds for Fund Accounting Services, dated January 1,
1994 (to be filed by amendment)
(9)(c) Inapplicable
(10) Opinion of Counsel, dated March 18, 1994
(11) Inapplicable
(12) Inapplicable
(13) Inapplicable
(14) Inapplicable
(15) Inapplicable
(16) Inapplicable
Item 25. Persons Controlled by or Under Common Control.
None.
Item 26. Number of Holders of Securities
As of March 18, 1994, there were zero shareholders in the T. Rowe
Price Fixed Income Series, Inc.
Item 27. Indemnification
The Registrant maintains comprehensive Errors and Omissions and Officers and
Directors insurance policies written by the Evanston Insurance Company, The
Chubb Group and ICI Mutual. These policies provide coverage for the named
insureds, which include T. Rowe Price Associates, Inc. ("Manager"), Rowe
Price-Fleming International, Inc. ("Price-Fleming"), T. Rowe Price Investment
Services, Inc., T. Rowe Price Services, Inc., T. Rowe Price Trust Company, T.
Rowe Price Stable Asset Management, Inc., RPF International Bond Fund and
thirty-four other investment companies, namely, T. Rowe Price Growth Stock
Fund, Inc., T. Rowe Price New Horizons Fund, Inc., T. Rowe Price New Era Fund,
Inc., T. Rowe Price New Income Fund, Inc., T. Rowe Price Prime Reserve Fund,
Inc., T. Rowe Price Tax-Free Income Fund, Inc., T. Rowe Price Tax-Exempt Money
Fund, Inc., T. Rowe Price International Funds, Inc., T. Rowe Price Growth &
Income Fund, Inc., T. Rowe Price Tax-Free Short-Intermediate Fund, Inc., T.
Rowe Price Short-Term Bond Fund, Inc., T. Rowe Price High Yield Fund, Inc., T.
Rowe Price Tax-Free High Yield Fund, Inc., T. Rowe Price New America Growth
Fund, T. Rowe Price Equity Income Fund, T. Rowe Price GNMA Fund, T. Rowe Price
Capital Appreciation Fund, T. Rowe Price State Tax-Free Income Trust, T. Rowe
Price California Tax-Free Income Trust, T. Rowe Price Science & Technology
PAGE 65
Fund, Inc., T. Rowe Price Small-Cap Value Fund, Inc., Institutional
International Funds, Inc., T. Rowe Price U.S. Treasury Funds, Inc., T. Rowe
Price Index Trust, Inc., T. Rowe Price Spectrum Fund, Inc., T. Rowe Price
Balanced Fund, Inc., T. Rowe Price Adjustable Rate U.S. Government Fund, Inc.,
T. Rowe Price Mid-Cap Growth Fund, Inc., T. Rowe Price OTC Fund, Inc., T. Rowe
Price Tax-Free Insured Intermediate Bond Fund, Inc., T. Rowe Price Dividend
Growth Fund, Inc., T. Rowe Price Blue Chip Growth Fund, Inc., T. Rowe Price
Summit Funds, Inc. and T. Rowe Price Summit Municipal Funds, Inc. The
Registrant and the thirty-four investment companies listed above, with the
exception of T. Rowe Price Index Trust, Inc. and Institutional International
Funds, Inc., will be collectively referred to as the Price Funds. The
investment manager for the Price Funds, including T. Rowe Price Index Trust,
Inc., is the Manager. Price-Fleming is the manager to T. Rowe Price
International Funds, Inc. and Institutional International Funds, Inc. and is
50% owned by TRP Finance, Inc., a wholly-owned subsidiary of the Manager, 25%
owned by Copthall Overseas Limited, a wholly-owned subsidiary of Robert
Fleming Holdings Limited, and 25% owned by Jardine Fleming Holdings Limited.
In addition to the corporate insureds, the policies also cover the officers,
directors, and employees of each of the named insureds. The premium is
allocated among the named corporate insureds in accordance with the provisions
of Rule 17d-1(d)(7) under the Investment Company Act of 1940.
General. The Charter of the Corporation provides that to the
fullest extent permitted by Maryland or federal law, no director of
officer of the Corporation shall be personally liable to the Corporation
or the holders of Shares for money damages and each director and officer
shall be indemnified by the Corporation; provided, however, that nothing
herein shall be deemed to protect any director or officer of the
Corporation against any liability to the Corporation of the holders of
Shares to which such director or officer would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his or her office.
Article X, Section 10.01 of the Registrant's By-Laws provides as follows:
Section 10.01. Indemnification and Payment of
Expenses in Advance: The Corporation shall indemnify any individual
("Indemnitee") who is a present or former director, officer, employee, or
agent of the Corporation, or who is or has been serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, who, by reason of his
position was, is, or is threatened to be made a party to any threatened,
pending, or completed action, suit, or proceeding, whether civil, criminal,
administrative, or investigative (hereinafter collectively referred to as a
"Proceeding") against any judgments, penalties, fines, settlements, and
reasonable expenses (including attorneys' fees) incurred by such Indemnitee in
connection with any Proceeding, to the fullest extent that such
indemnification may be lawful under Maryland law. The Corporation shall pay
any reasonable expenses so incurred by such Indemnitee in defending a
Proceeding in advance of the final disposition thereof to the fullest extent
that such advance payment may be lawful under Maryland law. Subject to any
applicable limitations and requirements set forth in the Corporation's
Articles of Incorporation and in these By-Laws, any payment of indemnification
or advance of expenses shall be made in accordance with the procedures set
forth in Maryland law.
<PAGE>
PAGE 66
Notwithstanding the foregoing, nothing herein shall protect or purport to
protect any Indemnitee against any liability to which he would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of his office
("Disabling Conduct").
Anything in this Article X to the contrary notwithstanding, no
indemnification shall be made by the Corporation to any Indemnitee unless:
(a) there is a final decision on the merits by a court or other body
before whom the Proceeding was brought that the Indemnitee was not
liable by reason of Disabling Conduct; or
(b) in the absence of such a decision, there is a reasonable
determination, based upon a review of the facts, that the Indemnitee
was not liable by reason of Disabling Conduct, which determination
shall be made by:
(i) the vote of a majority of a quorum of directors who are
neither "interested persons" of the Corporation as defined in
Section 2(a)(19) of the Investment Company Act, nor parties to
the Proceeding; or
(ii) an independent legal counsel in a written opinion.
Anything in this Article X to the contrary notwithstanding, any advance
of expenses by the Corporation to any Indemnitee shall be made only upon the
undertaking by such Indemnitee to repay the advance unless it is ultimately
determined that such Indemnitee is entitled to indemnification as above
provided, and only if one of the following conditions is met:
(a) the Indemnitee provides a security for his undertaking; or
(b) the Corporation shall be insured against losses arising by reason
of any lawful advances; or
(c) there is a determination, based on a review of readily available
facts, that there is reason to believe that the Indemnitee will
ultimately be found entitled to indemnification, which
determination shall be made by:
(i) a majority of a quorum of directors who are neither
"interested persons" of the Corporation as defined in Section
2(a)(19) of the Investment Company Act, nor parties to the
Proceeding; or
(ii) an independent legal counsel in a written opinion.
Section 10.02 of the Registrant's By-Laws provides as follows:
Section 10.02. Insurance of Officers, Directors, Employees and Agents:
To the fullest extent permitted by applicable Maryland law and by Section
17(h) of the Investment Company Act, as from time to time amended, the
Corporation may purchase and maintain insurance on behalf of any person who is
or was a director, officer, employee, or agent of the Corporation, or who is
or was serving at the request of the Corporation as a director, officer,
employee, or agent of another corporation, partnership, joint venture, trust,
or other enterprise, against any liability asserted against him and incurred
PAGE 67
by him in or arising out of his position, whether or not the Corporation would
have the power to indemnify him against such liability.
Insofar as indemnification for liability under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion
of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
Item 28. Business and Other Connections of Investment Manager.
Rowe Price-Fleming International, Inc. ("Price-Fleming"), a Maryland
corporation, is a corporate joint venture 50% owned by TRP Finance, Inc., a
wholly-owned subsidiary of the Manager, and was organized in 1979 to provide
investment counsel service with respect to foreign securities for
institutional investors in the United States. Price-Fleming, in addition to
managing private counsel client accounts, also sponsors registered investment
companies which invest in foreign securities, serves as general partner of
RPFI International Partners, Limited Partnership, and provides investment
advice to the T. Rowe Price Trust Company, trustee of the International Common
Trust Fund.
T. Rowe Price Investment Services, Inc. ("Investment Services"), a wholly-
owned subsidiary of the Manager, is a Maryland corporation organized in 1980
for the purpose of acting as the principal underwriter and distributor for the
Price Funds. Investment Services is registered as a broker-dealer under the
Securities Exchange Act of 1934 and is a member of the National Association of
Securities Dealers, Inc. In 1984, Investment Services expanded its activities
to include a discount brokerage service.
TRP Distribution, Inc., a wholly-owned subsidiary of Investment Services, is a
Maryland corporation organized in 1991. It was organized for and engages in
the sale of certain investment related products prepared by Investment
Services.
T. Rowe Price Associates Foundation, Inc., was organized in 1981 for the
purpose of making charitable contributions to religious, charitable,
scientific, literary and educational organizations. The Foundation (which is
not a subsidiary of the Manager) is funded solely by contributions from the
Manager and income from investments.
T. Rowe Price Services, Inc. ("Price Services"), a wholly-owned subsidiary of
the Manager, is a Maryland corporation organized in 1982 and is registered as
a transfer agent under the Securities Exchange Act of 1934. Price Services
provides transfer agent, dividend disbursing, and certain other services,
including shareholder services, to the Price Funds.
PAGE 68
T. Rowe Price Retirement Plan Services, Inc. ("RPS"), a wholly-owned
subsidiary of the Manager, was incorporated in Maryland in 1991 and is
registered as a transfer agent under the Securities Exchange Act of 1934. RPS
provides administrative, recordkeeping, and subaccounting services to
administrators of employee benefit plans.
T. Rowe Price Trust Company ("Trust Company"), a wholly-owned subsidiary of
the Manager, is a Maryland chartered limited purpose trust company, organized
in 1983 for the purpose of providing fiduciary services. The Trust Company
serves as trustee/custodian for employee benefit plans, common trust funds and
a few trusts.
T. Rowe Price Threshold Fund II, L.P., a Delaware limited partnership, was
organized in 1986 by the Manager, and invests in private financings of small
companies with high growth potential; the Manager is the General Partner of
the partnership.
RPFI International Partners, Limited Partnership, is a Delaware limited
partnership organized in 1985 for the purpose of investing in a diversified
group of small and medium-sized rapidly growing non-U.S. companies.
Price-Fleming is the general partner of this partnership, and certain clients
of Price-Fleming are its limited partners.
T. Rowe Price Real Estate Group, Inc. ("Real Estate Group"), is a Maryland
corporation and a wholly-owned subsidiary of the Manager established in 1986
to provide real estate services. Subsidiaries of Real Estate Group are: T.
Rowe Price Realty Income Fund I Management, Inc., a Maryland corporation
(General Partner of T. Rowe Price Realty Income Fund I, A No-Load Limited
Partnership), T. Rowe Price Realty Income Fund II Management, Inc., a Maryland
corporation (General Partner of T. Rowe Price Realty Income Fund II, America's
Sales-Commission-Free Real Estate Limited Partnership), T. Rowe Price Realty
Income Fund III Management, Inc., a Maryland corporation (General Partner of
T. Rowe Price Realty Income Fund III, America's Sales-Commission-Free Real
Estate Limited Partnership, a Delaware limited partnership), and T. Rowe Price
Realty Income Fund IV Management, Inc., a Maryland corporation (General
Partner of T. Rowe Price Realty Income Fund IV, America's
Sales-Commission-Free Real Estate Limited Partnership). Real Estate Group
serves as investment manager to T. Rowe Price Renaissance Fund, Ltd., A
Sales-Commission-Free Real Estate Investment, established in 1989 as a
Maryland corporation which qualifies as a REIT.
T. Rowe Price Stable Asset Management, Inc. ("Stable Asset Management") is a
Maryland corporation organized in 1988 as a wholly-owned subsidiary of the
Manager. Stable Asset Management, which is registered as an investment
adviser under the Investment Advisers Act of 1940, specializes in the
management of investment portfolios which seek stable and consistent
investment returns through the use of guaranteed investment contracts, bank
investment contracts, structured or synthetic investment contracts, and
short-term fixed-income securities.
T. Rowe Price Recovery Fund Associates, Inc., a Maryland corporation, is a
wholly-owned subsidiary of the Manager organized in 1988 for the purpose of
serving as the General Partner of T. Rowe Price Recovery Fund, L.P., a
Delaware limited partnership which invests in financially distressed
companies.
T. Rowe Price (Canada), Inc. is a Maryland corporation organized in 1988 as a
wholly-owned subsidiary of the Manager. This entity is registered as an
PAGE 69
investment adviser under the Investment Advisers Act of 1940, and may apply
for registration as an investment manager under the Securities Act of Ontario
in order to be eligible to provide certain services to the RPF
International Bond Fund, a trust (whose shares are sold in Canada) which
Price-Fleming serves as investment adviser.
Since 1983, the Manager has organized several distinct Maryland limited
partnerships, which are informally called the Pratt Street Ventures
partnerships, for the purpose of acquiring interests in growth-oriented
businesses.
Tower Venture, Inc., a wholly-owned subsidiary of the Manager, is a Maryland
corporation organized in 1989 for the purpose of serving as a general partner
of 100 East Pratt St., L.P., a Maryland limited partnership whose limited
partners also include the Manager. The purpose of the partnership is to
further develop and improve the property at 100 East Pratt Street, the site of
the Manager's headquarters, through the construction of additional office,
retail and parking space.
TRP Suburban, Inc. is a Maryland corporation organized in 1990 as a
wholly-owned subsidiary of the Manager. TRP Suburban has entered into
agreements with McDonogh School and CMANE-McDonogh-Rowe Limited Partnership to
construct an office building in Owings Mills, Maryland, which houses the
Manager's transfer agent, plan administrative services, retirement plan
services and operations support functions.
TRP Finance, Inc. and TRP Finance MRT, Inc., wholly-owned subsidiaries of the
Manager, are Delaware corporations organized in 1990 to manage certain passive
corporate investments and other intangible assets. TRP Finance MRT, Inc. was
dissolved on October 4, 1993.
T. Rowe Price Strategic Partners Fund, L.P. is a Delaware limited partnership
organized in 1990 for the purpose of investing in small public and private
companies seeking capital for expansion or undergoing a restructuring of
ownership. The general partner of the Fund is T. Rowe Price Strategic
Partners, L.P., a Delaware limited partnership whose general partner is T.
Rowe Price Strategic Partners Associates, Inc., ("Strategic Associates"), a
Maryland corporation which is a wholly-owned subsidiary of the Manager.
Strategic Associates also serves as the general partner of T. Rowe Price
Strategic Partners II, L.P., a Delaware limited partnership established in
1992, which in turn serves as general partner of T. Rowe price Strategic
Partners Fund II, L.P., a Delaware limited partnership organized in 1992.
Listed below are the directors of the Manager who have other substantial
businesses, professions, vocations, or employment aside from that of Director
of the Manager:
JAMES E. HALBKAT, JR., Director of the Manager. Mr. Halbkat is President of
U.S. Monitor Corporation, a provider of public response systems. Mr. Halbkat's
address is: P.O. Box 23109, Hilton Head Island, South Carolina 29925.
JOHN W. ROSENBLUM, Director of the Manager. Mr. Rosenblum is the Tayloe
Murphy Professor at the University of Virginia, and a director of: Chesapeake
Corporation, a manufacturer of paper products, Cadmus Communications Corp., a
provider of printing and communication services; Comdial Corporation, a
manufacturer of telephone systems for businesses; and Cone Mills Corporation,
a textiles producer. Mr. Rosenblum's address is: P.O. Box 6550,
Charlottesville, Virginia 22906.
PAGE 70
ROBERT L. STRICKLAND, Director of the Manager. Mr. Strickland is Chairman of
Lowe's Companies, Inc., a retailer of specialty home supplies. Mr.
Strickland's address is 604 Two Piedmont Plaza Building, Winston-Salem, North
Carolina 27104.
PHILIP C. WALSH, Director of the Manager. Mr. Walsh is a Consultant to Cyprus
Amax Minerals Company, Englewood, Colorado, and a director of Piedmont Mining
Company, Inc., Charlotte, North Carolina. Mr. Walsh's address is: Blue Mill
Road, Morristown, New Jersey 07960.
With the exception of Messrs. Halbkat, Rosenblum, Strickland, and Walsh, all
of the directors of the Manager are employees of the Manager.
George J. Collins, who is Chief Executive Officer, President, and a Managing
Director of the Manager, is a Director of Price-Fleming.
George A. Roche, who is Chief Financial Officer and a Managing Director of the
Manager, is a Vice President and a Director of Price-Fleming.
M. David Testa, who is a Managing Director of the Manager, is Chairman of the
Board of Price-Fleming.
Charles H. Salisbury, Jr., who is a Managing Director of the Manager, is a
Vice President and a Director of Price-Fleming.
Henry H. Hopkins, Charles P. Smith, and Peter Van Dyke, who are Managing
Directors of the Manager, are Vice Presidents of Price-Fleming.
Robert P. Campbell, Robert C. Howe, Veena A. Kutler, Heather R. Landon, George
A. Murnaghan, William F. Wendler, II, and Edward A. Wiese, who are Vice
Presidents of the Manager, are Vice Presidents of Price-Fleming.
Alvin M. Younger, Jr., who is a Managing Director and the Secretary and
Treasurer of the Manager, is Secretary and Treasurer of Price-Fleming.
Joseph P. Croteau, who is a Vice President of the Manager, is Controller of
Price-Fleming.
Nolan L. North, who is a Vice President and Assistant Treasurer of the
Manager, is Assistant Treasurer of Price-Fleming.
Leah P. Holmes, who is an Assistant Vice President of the Manager, is a Vice
President of Price-Fleming.
Barbara A. Van Horn, who is Assistant Secretary of the Manager, is Assistant
Secretary of Price-Fleming.
Certain directors and officers of the Manager are also officers and/or
directors of one or more of the Price Funds and/or one or more of the
affiliated entities listed herein.
See also "Management of Fund," in Registrant's Statement of Additional
Information.
<PAGE>
PAGE 71
Item 29. Principal Underwriters.
(a) The principal underwriter for the Registrant is Investment
Services. Investment Services acts as the principal underwriter for the
other thirty-four Price Funds. Investment Services is a wholly-owned
subsidiary of the Manager is registered as a broker-dealer under the
Securities Exchange Act of 1934 and is a member of the National
Association of Securities Dealers, Inc. Investment Services has been
formed for the limited purpose of distributing the shares of the Price
Funds and will not engage in the general securities business. Since the
Price Funds are sold on a no-load basis, Investment Services will not
receive any commission or other compensation for acting as principal
underwriter.
(b) The address of each of the directors and officers of Investment
Services listed below is 100 East Pratt Street, Baltimore, Maryland
21202.
Name and Principal Positions and Offices Offices
Business Address With Underwriter With Registrant
__________________ _____________________ _______________
James Sellers Riepe President and Director Vice President and
Director
Henry Holt Hopkins Vice President and Vice President
Director
Mark E. Rayford Director None
Charles E. Vieth Vice President and None
Director
Patricia M. Archer Vice President None
Edward C. Bernard Vice President None
Joseph C. Bonasorte Vice President None
Meredith C. Callanan Vice President None
Victoria C. Collins Vice President None
Christopher W. Dyer Vice President None
Mark S. Finn Vice President and None
Assistant Controller
Forrest R. Foss Vice President None
Patricia O. Goodyear Vice President None
James W. Graves Vice President None
Andrea G. Griffin Vice President None
Thomas Grizzard Vice President None
David J. Healy Vice President None
Joseph P. Healy Vice President None
Walter J. Helmlinger Vice President None
Eric G. Knauss Vice President None
Douglas G. Kremer Vice President None
Sharon Renae Krieger Vice President None
Keith Wayne Lewis Vice President None
David A. Lyons Vice President None
Sarah McCafferty Vice President None
Maurice A. Minerbi Vice President None
George A. Murnaghan Vice President None
Steven E. Norwitz Vice President None
Kathleen M. O'Brien Vice President None
Charles S. Peterson Vice President None
Pamela D. Preston Vice President None
Lucy B. Robins Vice President None
John R. Rockwell Vice President None
PAGE 72
William F. Wendler, II Vice President None
Jane F. White Vice President None
Thomas R. Woolley Vice President None
Alvin M. Younger, Jr. Secretary and Treasurer None
Joseph P. Croteau Controller None
Catherine L. Berkenkemper Assistant Vice President None
Patricia S. Butcher Assistant Vice President None
Laura H. Chasney Assistant Vice President None
George H. Finney Assistant Vice President None
John A. Galateria Assistant Vice President None
Cheryl A. Gustitus Assistant Vice President None
Keith J. Langrehr Assistant Vice President None
C. Lillian Matthews Assistant Vice President None
Tom J. Mauer Assistant Vice President None
Janice D. McCrory Assistant Vice President None
Sandra J. McHenry Assistant Vice President None
JeanneMarie B. Patella Assistant Vice President None
Arthur J. Siber Assistant Vice President None
Mary A. Tamberrino Assistant Vice President None
Monica R. Tucker Assistant Vice President None
Linda C. Wright Assistant Vice President None
Nolan L. North Assistant Treasurer None
Barbara A. VanHorn Assistant Secretary None
(c) Not applicable. Investment Services will not receive any
compensation with respect to its activities as underwriter for the Price
Funds since the Price Funds are sold on a no-load basis.
Item 30. Location of Accounts and Records.
All accounts, books, and other documents required to be maintained by T.
Rowe Price Fixed Income Series, Inc. under Section 31(a) of the
Investment Company Act of 1940 and the rules thereunder will be
maintained by T. Rowe Price Fixed Income Series, Inc., at its offices at
100 East Pratt Street, Baltimore, Maryland 21202. Transfer agent,
dividend disbursing, and shareholder service activities are performed by
T. Rowe Price Services, Inc., at 100 East Pratt Street, Baltimore,
Maryland 21202. Custodian activities for Income Series are performed at
State Street Bank and Trust Company's Service Center (State Street
South), 1776 Heritage Drive, Quincy, Massachusetts 02171.
Item 31. Management Services.
The Registrant is not a party to any management-related service contract,
other than as set forth in the Prospectus.
Item 32. Undertakings.
(a) The undersigned Registrant hereby undertakes to file an amendment
to the Registration Statement with certified financial statements
showing the initial capital received before accepting subscriptions
from any persons in excess of 25 if it raises its initial capital
pursuant to Section 14(a)(3) of the 1940 Act.
(b) The Fund will file, within four to six months from the effective
date of its registration statement, a post-effective amendment
using financial statements which need not be certified.
PAGE 73
(c) If requested to do so by the holders of at least 10% of all votes
entitled to be cast, the Fund will call a meeting of shareholders
for the purpose of voting on the question of removal of a director
or directors and will assist in communications with other
shareholders to the extent required by Section 16(c).
(d) The Registrant agrees to furnish, upon request and without charge,
a copy of its latest Annual Report to each person to whom a
prospectus is delivered.
<PAGE>
PAGE 74
Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Baltimore, State of
Maryland, this 18th day of March, 1994.
T. ROWE PRICE FIXED INCOME SERIES, INC.
/s/James S. Riepe
By:James S. Riepe, Vice President and Director
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated:
SIGNATURE TITLE DATE
________ _____ _____
/s/James S. Riepe
James S. Riepe Vice President and Director March 18, 1994
/s/Carmen F. Deyesu
Carmen F. Deyesu Treasurer March 18, 1994
PAGE 1
_____________________________________
ARTICLES OF INCORPORATION
OF
T. ROWE PRICE FIXED INCOME SERIES, INC.
________________________________________
<PAGE>
PAGE 2
T. ROWE PRICE FIXED INCOME SERIES, INC.
ARTICLES OF INCORPORATION
FIRST: THE UNDERSIGNED, Henry H. Hopkins, whose address is 100 East
Pratt Street, Baltimore, Maryland 21202, being at least eighteen years of age,
acting as incorporator, does hereby form a corporation under the General Laws
of the State of Maryland.
SECOND: (a) The name of the corporation (which is hereinafter called
the "Corporation") is:
T. Rowe Price Fixed Income Series, Inc.
(b) The Corporation acknowledges that it is adopting its corporate
name through permission of T. Rowe Price Associates, Inc., a Maryland
corporation (hereinafter referred to as "Price Associates"), and acknowledges
that Price Associates has the sole and exclusive right to use or license the
use of the name "T. Rowe Price" in commerce. The Corporation agrees that if
at any time and for any cause, the investment adviser or distributor of the
Corporation ceases to be Price Associates or an affiliate of Price Associates,
the Corporation shall at the written request of Price Associates take all
requisite action to amend its charter to eliminate the name "T. Rowe Price"
from the Corporation's corporate name and from the designations of its shares
of capital stock. The Corporation further acknowledges that Price Associates
reserves the right to grant the non-exclusive right to use the name "T. Rowe
Price" to any other corporation, including other investment companies, whether
now in existence or hereafter created.
THIRD: (a) The purposes for which the Corporation is formed and the
business and objects to be carried on and promoted by it are:
(1) To engage generally in the business of investing,
reinvesting, owning, holding or trading in securities, as defined in the
Investment Company Act of 1940, as from time to time amended
(hereinafter referred to as the "Investment Company Act"), as an
investment company classified under the Investment Company Act as a
management company.
(2) To engage in any one or more businesses or transactions, or
to acquire all or any portion of any entity engaged in any one or more
businesses or transactions, which the Board of Directors may from time
to time authorize or approve, whether or not related to the business
described elsewhere in this Article or to any other business at the time
or theretofore engaged in by the Corporation.
(b) The foregoing enumerated purposes and objects shall be in no way
limited or restricted by reference to, or inference from, the terms of any
other clause of this or any other Article of the charter of the Corporation,
and each shall be regarded as independent; and they are intended to be and
shall be construed as powers as well as purposes and objects of the
Corporation and shall be in addition to and not in limitation of the general
powers of corporations under the General Laws of the State of Maryland.
FOURTH: The present address of the principal office of the Corporation
in this State is:
PAGE 3
100 East Pratt Street
Baltimore, Maryland 21202
FIFTH: The name and address of the resident agent of the Corporation in
this State are:
Henry H. Hopkins
100 East Pratt Street
Baltimore, Maryland 21202
Said resident agent is a citizen of the State of Maryland, and actually
resides therein.
SIXTH: (a) The total number of shares of stock of all classes and
series which the Corporation initially has authority to issue is One Billion
(1,000,000,000) shares of capital stock (par value $.0001 per share),
amounting in aggregate par value to One Hundred Thousand Dollars ($100,000).
All of such shares are initially classified as "Common Stock" of the "T. Rowe
Price Limited-Term Bond Portfolio" series. Each such series shall consist,
until further changed, of the lesser of (x) 1,000,000,000 shares or (y) the
number of shares that could be issued by issuing all of the shares of any
series currently or hereafter classified less the total number of shares then
issued and outstanding in all of such series. The Board of Directors may
classify and reclassify any unissued shares of capital stock (whether or not
such shares have been previously classified or reclassified) by setting or
changing in any one or more respects the preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends,
qualifications, or terms or conditions of redemption of such shares of stock.
(b) The following is a description of the preferences, conversion and
other rights, voting powers, restrictions, limitations as to dividends,
qualifications, and terms and conditions of redemption of the shares of Common
Stock classified as the "T. Rowe Price Limited-Term Bond Portfolio" series and
any additional series of Common Stock of the Corporation (unless provided
otherwise by the Board of Directors with respect to any such additional series
at the time it is established and designated):
(1) Assets Belonging to Series. All consideration received by
the Corporation from the issue or sale of shares of a particular series,
together with all assets in which such consideration is invested or
reinvested, all income, earnings, profits and proceeds thereof,
including any proceeds derived from the sale, exchange or liquidation of
such assets, and any funds or payments derived from any investment or
reinvestment of such proceeds in whatever form the same may be, shall
irrevocably belong to that series for all purposes, subject only to the
rights of creditors, and shall be so recorded upon the books of account
of the Corporation. Such consideration, assets, income, earnings,
profits and proceeds, together with any General Items allocated to that
series as provided in the following sentence, are herein referred to
collectively as "assets belonging to" that series. In the event that
there are any assets, income, earnings, profits or proceeds which are
not readily identifiable as belonging to any particular series
(collectively, "General Items"), such General Items shall be allocated
by or under the supervision of the Board of Directors to and among any
one or more of the series established and designated from time to time
in such manner and on such basis as the Board of Directors, in its sole
discretion, deems fair and equitable; and any General Items so allocated
to a particular series shall belong to that series. Each such
allocation by the Board of Directors shall be conclusive and binding for
all purposes.
PAGE 4
(2) Liabilities of Series. The assets belonging to each
particular series shall be charged with the liabilities of the
Corporation in respect of that series and all expenses, costs, charges
and reserves attributable to that series, and any general liabilities,
expenses, costs, charges or reserves of the Corporation which are not
readily identifiable as pertaining to any particular series, shall be
allocated and charged by or under the supervision of the Board of
Directors to and among any one or more of the series established and
designated from time to time in such manner and on such basis as the
Board of Directors, in its sole discretion, deems fair and equitable.
The liabilities, expenses, costs, charges and reserves allocated and so
charged to a series are herein referred to collectively as "liabilities
of" that series. Each allocation of liabilities, expenses, costs,
charges and reserves by or under the supervision of the Board of
Directors shall be conclusive and binding for all purposes.
(3) Dividends and Distributions. Dividends and capital gains
distributions on shares of a particular series may be paid with such
frequency, in such form and in such amount as the Board of Directors may
determine by resolution adopted from time to time, or pursuant to a
standing resolution or resolutions adopted only once or with such
frequency as the Board of Directors may determine, after providing for
actual and accrued liabilities of that series. All dividends on shares
of a particular series shall be paid only out of the income belonging to
that series and all capital gains distributions on shares of a
particular series shall be paid only out of the capital gains belonging
to that series. All dividends and distributions on shares of a
particular series shall be distributed pro rata to the holders of that
series in proportion to the number of shares of that series held by such
holders at the date and time of record established for the payment of
such dividends or distributions, except that in connection with any
dividend or distribution program or procedure, the Board of Directors
may determine that no dividend or distribution shall be payable on
shares as to which the shareholder's purchase order and/or payment have
not been received by the time or times established by the Board of
Directors under such program or procedure.
Dividends and distributions may be paid in cash, property or
additional shares of the same or another series, or a combination
thereof, as determined by the Board of Directors or pursuant to any
program that the Board of Directors may have in effect at the time for
the election by shareholders of the form in which dividends or
distributions are to be paid. Any such dividend or distribution paid in
shares shall be paid at the current net asset value thereof.
(4) Voting. On each matter submitted to a vote of the
shareholders, each holder of shares shall be entitled to one vote for
each share standing in his name on the books of the Corporation,
irrespective of the series thereof, and all shares of all series shall
vote as a single class ("Single Class Voting"); provided, however, that
(i) as to any matter with respect to which a separate vote of any series
is required by the Investment Company Act or by the Maryland General
Corporation Law, such requirement as to a separate vote by that series
shall apply in lieu of Single Class Voting; (ii) in the event that the
separate vote requirement referred to in (i) above applies with respect
to one or more series, then, subject to (iii) below, the shares of all
other series shall vote as a single class; and (iii) as to any matter
which does not affect the interest of a particular series, including
liquidation of another series as described in subsection (7) below, only
PAGE 5
the holders of shares of the one or more affected series shall be
entitled to vote.
(5) Redemption by Shareholders. Each holder of shares of a
particular series shall have the right at such times as may be permitted
by the Corporation to require the Corporation to redeem all or any part
of his shares of that series, at a redemption price per share equal to
the net asset value per share of that series next determined after the
shares are properly tendered for redemption, less such redemption fee or
sales charge, if any, as may be established by the Board of Directors in
its sole discretion. Payment of the redemption price shall be in cash;
provided, however, that if the Board of Directors determines, which
determination shall be conclusive, that conditions exist which make
payment wholly in cash unwise or undesirable, the Corporation may, to
the extent and in the manner permitted by the Investment Company Act,
make payment wholly or partly in securities or other assets belonging to
the series of which the shares being redeemed are a part, at the value
of such securities or assets used in such determination of net asset
value.
Notwithstanding the foregoing, the Corporation may postpone payment
of the redemption price and may suspend the right of the holders of
shares of any series to require the Corporation to redeem shares of that
series during any period or at any time when and to the extent
permissible under the Investment Company Act.
(6) Redemption by Corporation. The Board of Directors may cause
the Corporation to redeem at net asset value the shares of any series
from a holder (i) if the Board of Directors of the Corporation
determines in its sole discretion that failure to so redeem such shares
may have materially adverse consequences to the holders of shares of the
Corporation or any series, or (ii) upon such other conditions with
respect to the maintenance of shareholder accounts of a minimum amount
as may from time to time be established by the Board of Directors in its
sole discretion.
(7) Liquidation. In the event of the liquidation of a
particular series, the shareholders of the series that is being
liquidated shall be entitled to receive, as a class, when and as
declared by the Board of Directors, the excess of the assets belonging
to that series over the liabilities of that series. The holders of
shares of any particular series shall not be entitled thereby to any
distribution upon liquidation of any other series. The assets so
distributable to the shareholders of any particular series shall be
distributed among such shareholders in proportion to the number of
shares of that series held by them and recorded on the books of the
Corporation. The liquidation of any particular series in which there
are shares then outstanding may be authorized by vote of a majority of
the Board of Directors then in office, subject to the approval of a
majority of the outstanding voting securities of that series, as defined
in the Investment Company Act, and without the vote of the holders of
shares of any other series. The liquidation of a particular series may
be accomplished, in whole or in part, by the transfer of assets of such
series to another series or by the exchange of shares of such series for
the shares of another series.
(8) Net Asset Value Per Share. The net asset value per share of
any series shall be the quotient obtained by dividing the value of the
net assets of that series (being the value of the assets belonging to
that series less the liabilities of that series) by the total number of
PAGE 6
shares of that series outstanding, all as determined by or under the
direction of the Board of Directors in accordance with generally
accepted accounting principles and the Investment Company Act. Subject
to the applicable provisions of the Investment Company Act, the Board of
Directors, in its sole discretion, may prescribe and shall set forth in
the By-Laws of the Corporation or in a duly adopted resolution of the
Board of Directors such bases and times for determining the value of the
assets belonging to, and the net asset value per share of outstanding
shares of, each series, or the net income attributable to such shares,
as the Board of Directors deems necessary or desirable. The Board of
Directors shall have full discretion, to the extent not inconsistent
with the Maryland General Corporation Law and the Investment Company
Act, to determine which items shall be treated as income and which items
as capital and whether any item of expense shall be charged to income or
capital. Each such determination and allocation shall be conclusive and
binding for all purposes.
The Board of Directors may determine to maintain the net asset
value per share of any series at a designated constant dollar amount and
in connection therewith may adopt procedures not inconsistent with the
Investment Company Act for the continuing declaration of income
attributable to that series as dividends and for the handling of any
losses attributable to that series. Such procedures may provide that in
the event of any loss, each shareholder shall be deemed to have
contributed to the capital of the Corporation attributable to that
series his pro rata portion of the total number of shares required to be
canceled in order to permit the net asset value per share of that series
to be maintained, after reflecting such loss, at the designated constant
dollar amount. Each shareholder of the Corporation shall be deemed to
have agreed, by his investment in any series with respect to which the
Board of Directors shall have adopted any such procedure, to make the
contribution referred to in the preceding sentence in the event of any
such loss.
(9) Equality. All shares of each particular series shall
represent an equal proportionate interest in the assets belonging to
that series (subject to the liabilities of that series), and each share
of any particular series shall be equal to each other share of that
series. The Board of Directors may from time to time divide or combine
the shares of any particular series into a greater or lesser number of
shares of that series without thereby changing the proportionate
interest in the assets belonging to that series or in any way affecting
the rights of holders of shares of any other series.
(10) Conversion or Exchange Rights. Subject to compliance with
the requirements of the Investment Company Act, the Board of Directors
shall have the authority to provide that holders of shares of any series
shall have the right to convert or exchange said shares into shares of
one or more other classes or series of shares in accordance with such
requirements and procedures as may be established by the Board of
Directors.
(c) The shares of Common Stock of the Corporation, or of any series of
Common Stock of the Corporation to the extent such Common Stock is divided
into series, may be further subdivided into classes (which may, for
convenience of reference be referred to a term other than "class"). Unless
otherwise provided in the Articles Supplementary establishing such classes,
all such shares, or all shares of a series of Common Stock in a series, shall
have identical voting, dividend, and liquidation rights. Shares of the
classes shall also be subject to such front-end sales loads, contingent
PAGE 7
deferred sales charges, expenses (including, without limitation, distribution
expenses under a Rule 12b-1 plan and administrative expenses under an
administration or service agreement, plan or other arrangement, however
designated), conversion rights, and class voting rights as shall be consistent
with Maryland law, the Investment Company Act of 1940, and the rules and
regulations of the National Association of Securities Dealers and shall be
contained in Articles Supplementary establishing such classes.
(d) For the purposes hereof and of any articles supplementary to the
charter providing for the classification or reclassification of any shares of
capital stock or of any other charter document of the Corporation (unless
otherwise provided in any such articles or document), any class or series of
stock of the Corporation shall be deemed to rank:
(1) prior to another class or series either as to dividends or
upon liquidation, if the holders of such class or series shall be
entitled to the receipt of dividends or of amounts distributable on
liquidation, dissolution or winding up, as the case may be, in
preference or priority to holders of such other class or series;
(2) on a parity with another class or series either as to
dividends or upon liquidation, whether or not the dividend rates,
dividend payment dates or redemption or liquidation price per share
thereof be different from those of such others, if the holders of such
class or series of stock shall be entitled to receipt of dividends or
amounts distributable upon liquidation, dissolution or winding up, as
the case may be, in proportion to their respective dividend rates or
redemption or liquidation prices, without preference or priority over
the holders of such other class or series; and
(3) junior to another class or series either as to dividends or
upon liquidation, if the rights of the holders of such class or series
shall be subject or subordinate to the rights of the holders of such
other class or series in respect of the receipt of dividends or the
amounts distributable upon liquidation, dissolution or winding up, as
the case may be.
(e) Unless otherwise prohibited by law, so long as the Corporation is
registered as an open-end management investment company under the Investment
Company Act, the Board of Directors shall have the power and authority,
without the approval of the holders of any outstanding shares, to increase or
decrease the number of shares of capital stock or the number of shares of
capital stock of any class or series that the Corporation has authority to
issue.
(f) The Corporation may issue and sell fractions of shares of capital
stock having pro rata all the rights of full shares, including, without
limitation, the right to vote and to receive dividends, and wherever the words
"share" or "shares" are used in the charter or By-Laws of the Corporation,
they shall be deemed to include fractions of shares, where the context does
not clearly indicate that only full shares are intended.
(g) The Corporation shall not be obligated to issue certificates
representing shares of any class or series of capital stock. At the time of
issue or transfer of shares without certificates, the Corporation shall
provide the shareholder with such information as may be required under the
Maryland General Corporation Law.
SEVENTH: The number of directors of the Corporation shall initially be
one (1), which number may be increased or decreased pursuant to the By-Laws of
PAGE 8
the Corporation, but shall never be less than the minimum number permitted by
the General Laws of the State of Maryland now or hereafter in force. James S.
Riepe shall serve as director until the first annual meeting and until his
successor is elected and qualified.
EIGHTH: (a) The following provisions are hereby adopted for the
purpose of defining, limiting, and regulating the powers of the Corporation
and of the directors and shareholders:
(1) The Board of Directors is hereby empowered to authorize the
issuance from time to time of shares of its stock of any class or
series, whether now or hereafter authorized, or securities convertible
into shares of its stock of any class or series, whether now or
hereafter authorized, for such consideration as may be deemed advisable
by the Board of Directors and without any action by the shareholders.
(2) No holder of any stock or any other securities of the
Corporation, whether now or hereafter authorized, shall have any
preemptive right to subscribe for or purchase any stock or any other
securities of the Corporation other than such, if any, as the Board of
Directors, in its sole discretion, may determine and at such price or
prices and upon such other terms as the Board of Directors, in its sole
discretion, may fix; and any stock or other securities which the Board
of Directors may determine to offer for subscription may, as the Board
of Directors in its sole discretion shall determine, be offered to the
holders of any class, series or type of stock or other securities at the
time outstanding to the exclusion of the holders of any or all other
classes, series or types of stock or other securities at the time
outstanding.
(3) The Board of Directors of the Corporation shall, consistent
with applicable law, have power in its sole discretion to determine from
time to time in accordance with sound accounting practice or other
reasonable valuation methods what constitutes annual or other net
profits, earnings, surplus, or net assets in excess of capital; to
determine that retained earnings or surplus shall remain in the hands of
the Corporation; to set apart out of any funds of the Corporation such
reserve or reserves in such amount or amounts and for such proper
purpose or purposes as it shall determine and to abolish any such
reserve or any part thereof; to distribute and pay distributions or
dividends in stock, cash or other securities or property, out of surplus
or any other funds or amounts legally available therefor, at such times
and to the shareholders of record on such dates as it may, from time to
time, determine; and to determine whether and to what extent and at what
times and places and under what conditions and regulations the books,
accounts and documents of the Corporation, or any of them, shall be open
to the inspection of shareholders, except as otherwise provided by
statute or by the By-Laws, and, except as so provided, no shareholder
shall have any right to inspect any book, account or document of the
Corporation unless authorized so to do by resolution of the Board of
Directors.
(4) Notwithstanding any provision of law requiring the
authorization of any action by a greater proportion than a majority of
the total number of shares of all classes and series of capital stock or
of the total number of shares of any class or series of capital stock
entitled to vote as a separate class, such action shall be valid and
effective if authorized by the affirmative vote of the holders of a
majority of the total number of shares of all classes and series
outstanding and entitled to vote thereon, or of the class or series
PAGE 9
entitled to vote thereon as a separate class, as the case may be, except
as otherwise provided in the charter of the Corporation.
(5) The Corporation shall indemnify (i) its past and present
directors and officers, whether serving the Corporation or at its
request any other entity, to the full extent required or permitted by
the General Laws of the State of Maryland now or hereafter in force,
including the advance of expenses under the procedures and to the full
extent permitted by law, and (ii) other employees and agents to such
extent as shall be authorized by the Board of Directors or the By-Laws
and as permitted by law. Nothing contained herein shall be construed to
protect any director or officer of the Corporation against any liability
to the Corporation or its security holders to which he would otherwise
be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct
of his office. The foregoing rights of indemnification shall not be
exclusive of any other rights to which those seeking indemnification may
be entitled. The Board of Directors may take such action as is
necessary to carry out these indemnification provisions and is expressly
empowered to adopt, approve and amend from time to time such by-laws,
resolutions or contracts implementing such provisions or such further
indemnification arrangements as may be permitted by law. No amendment
of the charter of the Corporation or repeal of any of its provisions
shall limit or eliminate the right of indemnification provided hereunder
with respect to acts or omissions occurring prior to such amendment or
repeal.
(6) To the fullest extent permitted by Maryland statutory or
decisional law, as amended or interpreted, and the Investment Company
Act, no director or officer of the Corporation shall be personally
liable to the Corporation or its shareholders for money damages;
provided, however, that nothing herein shall be construed to protect any
director or officer of the Corporation against any liability to the
Corporation or its security holders to which he would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence,
or reckless disregard of the duties involved in the conduct of his
office. No amendment of the charter of the Corporation or repeal of any
of its provisions shall limit or eliminate the limitation of liability
provided to directors and officers hereunder with respect to any act or
omission occurring prior to such amendment or repeal.
(7) The Corporation reserves the right from time to time to make
any amendments of its charter which may now or hereafter be authorized
by law, including any amendments changing the terms or contract rights,
as expressly set forth in its charter, of any of its outstanding stock
by classification, reclassification or otherwise.
(b) The enumeration and definition of particular powers of the Board
of Directors included in the foregoing shall in no way be limited or
restricted by reference to or inference from the terms of any other clause of
this or any other Article of the charter of the Corporation, or construed as
or deemed by inference or otherwise in any manner to exclude or limit any
powers conferred upon the Board of Directors under the General Laws of the
State of Maryland now or hereafter in force.
NINTH: The duration of the Corporation shall be perpetual.
<PAGE>
PAGE 10
IN WITNESS WHEREOF, I have signed these Articles of Incorporation,
acknowledging the same to be my act, on this 16th day of March, 1994.
Witness:
/s/Lenora V. Hornung /s/Henry H. Hopkins
_____________________________ ______________________________________
Lenora V. Hornung Henry H. Hopkins
PAGE 1
BY-LAWS
OF
T. ROWE PRICE FIXED INCOME SERIES, INC.
<PAGE>
PAGE 2
TABLE OF CONTENTS
Page
ARTICLE I. NAME OF CORPORATION, LOCATION OF OFFICES AND SEAL . . .1
1.01. Name. . . . . . . . . . . . . . . . . . . . . . . . . .1
1.02. Principal Office. . . . . . . . . . . . . . . . . . . .1
1.03. Seal. . . . . . . . . . . . . . . . . . . . . . . . . .1
ARTICLE II. SHAREHOLDERS. . . . . . . . . . . . . . . . . . . . . .1
2.01. Annual Meetings . . . . . . . . . . . . . . . . . . . .1
2.02. Special Meetings. . . . . . . . . . . . . . . . . . . .2
2.03. Place of Meetings . . . . . . . . . . . . . . . . . . .2
2.04. Notice of Meetings. . . . . . . . . . . . . . . . . . .2
2.05. Voting - in General . . . . . . . . . . . . . . . . . .2
2.06. Shareholders Entitled to Vote . . . . . . . . . . . . .3
2.07. Voting - Proxies. . . . . . . . . . . . . . . . . . . .3
2.08. Quorum. . . . . . . . . . . . . . . . . . . . . . . . .3
2.09. Absence of Quorum . . . . . . . . . . . . . . . . . . .3
2.10. Stock Ledger and List of Shareholders . . . . . . . . .4
2.11. Informal Action by Shareholders . . . . . . . . . . . .4
ARTICLE III. BOARD OF DIRECTORS. . . . . . . . . . . . . . . . . . .4
3.01. Number and Term of Office . . . . . . . . . . . . . . .4
3.02. Qualification of Directors. . . . . . . . . . . . . . .4
3.03. Election of Directors . . . . . . . . . . . . . . . . .5
3.04. Removal of Directors. . . . . . . . . . . . . . . . . .5
3.05. Vacancies and Newly Created Directorships . . . . . . .5
3.06. General Powers. . . . . . . . . . . . . . . . . . . . .5
3.07. Power to Issue and Sell Stock . . . . . . . . . . . . .6
3.08. Power to Declare Dividends. . . . . . . . . . . . . . .6
3.09. Annual and Regular Meetings . . . . . . . . . . . . . .6
3.10. Special Meetings. . . . . . . . . . . . . . . . . . . .6
3.11. Notice. . . . . . . . . . . . . . . . . . . . . . . . .7
3.12. Waiver of Notice. . . . . . . . . . . . . . . . . . . .7
3.13. Quorum and Voting . . . . . . . . . . . . . . . . . . .7
3.14. Conference Telephone. . . . . . . . . . . . . . . . . .7
3.15. Compensation. . . . . . . . . . . . . . . . . . . . . .7
3.16. Action without a Meeting. . . . . . . . . . . . . . . .7
3.17. Director Emeritus . . . . . . . . . . . . . . . . . . .7
ARTICLE IV. EXECUTIVE COMMITTEE AND OTHER COMMITTEES. . . . . . . .8
4.01. How Constituted . . . . . . . . . . . . . . . . . . . .8
4.02. Powers of the Executive Committee . . . . . . . . . . .8
4.03. Other Committees of the Board of Directors. . . . . . .8
4.04. Proceedings, Quorum and Manner of Acting. . . . . . . .8
4.05. Other Committees. . . . . . . . . . . . . . . . . . . .8
<PAGE>
PAGE 3
ARTICLE V. OFFICERS. . . . . . . . . . . . . . . . . . . . . . . .9
5.01. General . . . . . . . . . . . . . . . . . . . . . . . .9
5.02. Election, Term of Office and Qualifications . . . . . .9
5.03. Resignation . . . . . . . . . . . . . . . . . . . . . .9
5.04. Removal . . . . . . . . . . . . . . . . . . . . . . . .9
5.05. Vacancies and Newly Created Offices . . . . . . . . . .9
5.06. Chairman of the Board . . . . . . . . . . . . . . . . .9
5.07. President . . . . . . . . . . . . . . . . . . . . . . .10
5.08. Vice President. . . . . . . . . . . . . . . . . . . . .10
5.09. Treasurer and Assistant Treasurers. . . . . . . . . . .10
5.10. Secretary and Assistant Secretaries . . . . . . . . . .11
5.11. Subordinate Officers. . . . . . . . . . . . . . . . . .11
5.12. Remuneration. . . . . . . . . . . . . . . . . . . . . .11
5.13. Surety Bond . . . . . . . . . . . . . . . . . . . . . .11
ARTICLE VI. CUSTODY OF SECURITIES AND CASH. . . . . . . . . . . . .11
6.01. Employment of a Custodian . . . . . . . . . . . . . . .11
6.02. Central Certificate Service . . . . . . . . . . . . . .12
6.03. Cash Assets . . . . . . . . . . . . . . . . . . . . . .12
6.04. Free Cash Accounts. . . . . . . . . . . . . . . . . . .12
6.05. Action Upon Termination of Custodian Agreement. . . . .12
6.06. Other Arrangements. . . . . . . . . . . . . . . . . . .12
ARTICLE VII. EXECUTION OF INSTRUMENTS, VOTING OF SECURITIES. . . . .13
7.01. Execution of Instruments. . . . . . . . . . . . . . . .13
7.02. Voting of Securities. . . . . . . . . . . . . . . . . .13
ARTICLE VIII. CAPITAL STOCK. . . . . . . . . . . . . . . . . . . . .13
8.01. Ownership of Shares . . . . . . . . . . . . . . . . . .13
8.02. Transfer of Capital Stock . . . . . . . . . . . . . . .13
8.03. Transfer Agents and Registrars. . . . . . . . . . . . .14
8.04. Transfer Regulations. . . . . . . . . . . . . . . . . .14
8.05. Fixing of Record Date . . . . . . . . . . . . . . . . .14
ARTICLE IX. FISCAL YEAR, ACCOUNTANT . . . . . . . . . . . . . . . .14
9.01. Fiscal Year . . . . . . . . . . . . . . . . . . . . . .14
9.02. Accountant. . . . . . . . . . . . . . . . . . . . . . .14
ARTICLE X. INDEMNIFICATION AND INSURANCE . . . . . . . . . . . . .15
10.01. Indemnification and Payment of Expenses in Advance. . .15
10.02. Insurance of Officers, Directors, Employees and Agents.16
10.03. Amendment . . . . . . . . . . . . . . . . . . . . . . .17
ARTICLE XI. AMENDMENTS. . . . . . . . . . . . . . . . . . . . . . .17
11.01. General . . . . . . . . . . . . . . . . . . . . . . . .17
11.02. By Shareholders Only. . . . . . . . . . . . . . . . . .17
PAGE 4
ARTICLE XII. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . .17
12.01 Use of the Term "Annual Meeting". . . . . . . . . . . .17
<PAGE>
PAGE 5
T. ROWE PRICE FIXED INCOME SERIES, INC.
(A Maryland Corporation)
BY-LAWS
ARTICLE I
NAME OF CORPORATION,
LOCATION OF OFFICES AND SEAL
Section 1.01.Name: The name of the Corporation is T. ROWE PRICE FIXED
INCOME SERIES, INC.
Section 1.02.Principal Office: The principal office of the Corporation
in the State of Maryland shall be located in the City of Baltimore. The
Corporation may, in addition, establish and maintain such other offices and
places of business, within or outside the State of Maryland, as the Board of
Directors may from time to time determine. [MGCL, Sections 2-103(4), 2-
108(a)(1)]
Section 1.03.Seal: The corporate seal of the Corporation shall be
circular in form, and shall bear the name of the Corporation, the year of its
incorporation, and the words "Corporate Seal, Maryland." The form of the seal
shall be subject to alteration by the Board of Directors and the seal may be
used by causing it or a facsimile to be impressed or affixed or printed or
otherwise reproduced. In lieu of affixing the corporate seal to any document
it shall be sufficient to meet the requirements of any law, rule, or
regulation relating to a corporate seal to affix the word "(Seal)" adjacent to
the signature of the authorized officer of the Corporation. Any officer or
Director of the Corporation shall have authority to affix the corporate seal
of the Corporation to any document requiring the same. [MGCL, Sections 1-
304(b), 2-103(3)]
ARTICLE II
SHAREHOLDERS
Section 2.01.Annual Meetings: The Corporation shall not be required to
hold an annual meeting of its shareholders in any year unless the Investment
Company Act of 1940 requires an election of directors by shareholders. In the
event that the Corporation shall be so required to hold an annual meeting,
such meeting shall be held at a date and time set by the Board of Directors,
which date shall be no later than 120 days after the occurrence of the event
requiring the meeting. Any shareholders' meeting held in accordance with the
preceding sentence shall for all purposes constitute the annual meeting of
PAGE 6
shareholders for the fiscal year of the corporation in which the meeting is
held. At any such meeting, the shareholders shall elect directors to hold the
offices of any directors who have held office for more than one year or who
have been elected by the Board of Directors to fill vacancies which result
from any cause. Except as the Articles of Incorporation or statute provides
otherwise, Directors may transact any business within the powers of the
Corporation as may properly come before the meeting. Any business of the
Corporation may be transacted at the annual meeting without being specially
designated in the notice, except such business as is specifically required by
statute to be stated in the notice. [MGCL, Section 2-501]
Section 2.02.Special Meetings: Special meetings of the shareholders may
be called at any time by the Chairman of the Board, the President, any Vice
President, or by the Board of Directors. Special meetings of the shareholders
shall be called by the Secretary on the written request of shareholders
entitled to cast at least ten (10) percent of all the votes entitled to be
cast at such meeting, provided that (a) such request shall state the purpose
or purposes of the meeting and the matters proposed to be acted on, and (b)
the shareholders requesting the meeting shall have paid to the Corporation the
reasonably estimated cost of preparing and mailing the notice thereof, which
the Secretary shall determine and specify to such shareholders. Unless
requested by shareholders entitled to cast a majority of all the votes
entitled to be cast at the meeting, a special meeting need not be called to
consider any matter which is substantially the same as a matter voted upon at
any special meeting of the shareholders held during the preceding twelve (12)
months. [MGCL, Section 2-502]
Section 2.03.Place of Meetings: All shareholders' meetings shall be
held at such place within the United States as may be fixed from time to time
by the Board of Directors. [MGCL, Section 2-503]
Section 2.04.Notice of Meetings: Not less than ten (10) days, nor more
than ninety (90) days before each shareholders' meeting, the Secretary or an
Assistant Secretary of the Corporation shall give to each shareholder entitled
to vote at the meeting, and each other shareholder entitled to notice of the
meeting, written notice stating (1) the time and place of the meeting, and (2)
the purpose or purposes of the meeting if the meeting is a special meeting or
if notice of the purpose is required by statute to be given. Such notice
shall be personally delivered to the shareholder, or left at his residence or
usual place of business, or mailed to him at his address as it appears on the
records of the Corporation. Notice shall be deemed to be given when deposited
in the United States mail addressed to the shareholders as aforesaid. No
notice of a shareholders' meeting need be given to any shareholder who shall
sign a written waiver of such notice, whether before or after the meeting,
which is filed with the records of shareholders' meetings, or to any
shareholder who is present at the meeting in person or by proxy. Notice of
adjournment of a shareholders' meeting to another time or place need not be
given if such time and place are announced at the meeting, unless the
adjournment is for more than one hundred twenty (120) days after the original
record date. Irregularities in the notice of any meeting to, or the
nonreceipt of any such notice by, any of the stockholders shall not invalidate
any action otherwise properly taken by or at any such meeting. [MGCL,
Sections 2-504, 2-511(d)]
Section 2.05.Voting - In General: Except as otherwise specifically
provided in the Articles of Incorporation or these By-Laws, or as required by
provisions of the Investment Company Act with respect to the vote of a series,
if any, of the Corporation, at every shareholders' meeting, each shareholder
shall be entitled to one vote for each share of stock of the Corporation
validly issued and outstanding and held by such shareholder, except that no
PAGE 7
shares held by the Corporation shall be entitled to a vote. Fractional shares
shall be entitled to fractional votes. Except as otherwise specifically
provided in the Articles of Incorporation, or these By-Laws, or as required by
provisions of the Investment Company Act, a majority of all the votes cast at
a meeting at which a quorum is present is sufficient to approve any matter
which properly comes before the meeting. The vote upon any question shall be
by ballot whenever requested by any person entitled to vote, but, unless such
a request is made, voting may be conducted in any way approved by the meeting.
[MGCL, Sections 2-214(a)(i), 2-506(a)(2), 2-507(a), 2-509(b)]
At any meeting at which there is an election of Directors, the Chairman
of the meeting may, and upon the request of the holders of ten (10) percent of
the stock entitled to vote at such election shall, appoint two inspectors of
election who shall first subscribe an oath or affirmation to execute
faithfully the duties of inspectors at such election with strict impartiality
and according to the best of their ability, and shall, after the election,
make a certificate of the result of the vote taken. No candidate for the
office of Director shall be appointed as an inspector.
Section 2.06.Shareholders Entitled to Vote: If, pursuant to Section
8.05 hereof, a record date has been fixed for the determination of
shareholders entitled to notice of or to vote at any shareholders' meeting,
each shareholder of the Corporation shall be entitled to vote in person or by
proxy, each share or fraction of a share of stock outstanding in his name on
the books of the Corporation on such record date. If no record date has been
fixed for the determination of shareholders, the record date for the
determination of shareholders entitled to notice of or to vote at a meeting of
shareholders shall be at the close of business on the day on which notice of
the meeting is mailed or the 30th day before the meeting, whichever is the
closer date to the meeting, or, if notice is waived by all shareholders, at
the close of business on the tenth (10th) day next preceding the date of the
meeting. [MGCL, Sections 2-507, 2-511]
Section 2.07.Voting - Proxies: The right to vote by proxy shall exist
only if the instrument authorizing such proxy to act shall have been executed
in writing by the shareholder himself, or by his attorney thereunto duly
authorized in writing. No proxy shall be valid more than eleven (11) months
after its date unless it provides for a longer period. All proxies shall be
delivered to the Secretary of the Corporation or to the person acting as
Secretary of the meeting before being voted, who shall decide all questions
concerning qualification of voters, the validity of proxies, and the
acceptance or rejection of votes. If inspectors of election have been
appointed by the chairman of the meeting, such inspectors shall decide all
such questions. A proxy with respect to stock held in the name of two or more
persons shall be valid if executed by one of them unless at or prior to
exercise of such proxy the Corporation receives a specific written notice to
the contrary from any one of them. A proxy purporting to be executed by or on
behalf of a shareholder shall be deemed valid unless challenged at or prior to
its exercise. [MGCL, Section 2-507(b)]
Section 2.08.Quorum: The presence at any shareholders' meeting, in
person or by proxy, of shareholders entitled to cast a majority of the votes
entitled to be cast at the meeting shall constitute a quorum. [MGCL, Section
2-506(a)]
Section 2.09.Absence of Quorum: In the absence of a quorum, the holders
of a majority of shares entitled to vote at the meeting and present thereat in
person or by proxy, or, if no shareholder entitled to vote is present in
person or by proxy, any officer present who is entitled to preside at or act
PAGE 8
as Secretary of such meeting, may adjourn the meeting sine die or from time to
time. Any business that might have been transacted at the meeting originally
called may be transacted at any such adjourned meeting at which a quorum is
present.
Section 2.10.Stock Ledger and List of Shareholders: It shall be the
duty of the Secretary or Assistant Secretary of the Corporation to cause an
original or duplicate stock ledger to be maintained at the office of the
Corporation's transfer agent, containing the names and addresses of all
shareholders and the number of shares of each class held by each shareholder.
Such stock ledger may be in written form, or any other form capable of being
converted into written form within a reasonable time for visual inspection.
Any one or more persons, who together are and for at least six (6) months have
been shareholders of record of at least five percent (5%) of the outstanding
capital stock of the Corporation, may submit (unless the Corporation at the
time of the request maintains a duplicate stock ledger at its principal
office) a written request to any officer of the Corporation or its resident
agent in Maryland for a list of the shareholders of the Corporation. Within
twenty (20) days after such a request, there shall be prepared and filed at
the Corporation's principal office a list, verified under oath by an officer
of the Corporation or by its stock transfer agent or registrar, which sets
forth the name and address of each shareholder and the number of shares of
each class which the shareholder holds. [MGCL, Sections 2-209, 2-513]
Section 2.11.Informal Action By Shareholders: Any action required or
permitted to be taken at a meeting of shareholders may be taken without a
meeting if the following are filed with the records of shareholders' meetings:
(a) A unanimous written consent which sets forth the action and is
signed by each shareholder entitled to vote on the matter; and
(b) A written waiver of any right to dissent signed by each
shareholder entitled to notice of the meeting, but not entitled to
vote at it.
[MGCL, Section 2-505]
ARTICLE III
BOARD OF DIRECTORS
Section 3.01.Number and Term of Office: The Board of Directors shall
consist of one (1) Director, which number may be increased by a resolution of
a majority of the entire Board of Directors, provided that the number of
Directors shall not be more than fifteen (15) nor less than the lesser of (i)
three (3) or (ii) the number of shareholders of the Corporation. Each
Director (whenever elected) shall hold office until the next annual meeting of
shareholders and until his successor is elected and qualifies or until his
earlier death, resignation, or removal. [MGCL, Sections 2-402, 2-404, 2-405]
Section 3.02.Qualification of Directors: No member of the Board of
Directors need be a shareholder of the Corporation, but at least one member of
the Board of Directors shall be a person who is not an interested person (as
such term is defined in the Investment Company Act) of the investment adviser
of the Corporation, nor an officer or employee of the Corporation. [MGCL,
Section 2-403; Investment Company Act, Section 10(d)]
PAGE 9
Section 3.03.Election of Directors: Until the first annual meeting of
shareholders, or until successors are duly elected and qualified, the Board of
Directors shall consist of the persons named as such in the Articles of
Incorporation. Thereafter, except as otherwise provided in Sections 3.04 and
3.05 hereof, at each annual meeting, the shareholders shall elect Directors to
hold office until the next annual meeting and/or until their successors are
elected and qualify. In the event that Directors are not elected at an annual
shareholders' meeting, then Directors may be elected at a special
shareholders' meeting. Directors shall be elected by vote of the holders of a
plurality of the shares present in person or by proxy and entitled to vote.
[MGCL, Section 2-404]
Section 3.04.Removal of Directors: At any meeting of shareholders, duly
called and at which a quorum is present, the shareholders may, by the
affirmative vote of the holders of a majority of the votes entitled to be cast
thereon, remove any Director or Directors from office, either with or without
cause, and may elect a successor or successors to fill any resulting vacancies
for the unexpired terms of removed Directors. [MGCL, Sections 2-406, 2-407]
Section 3.05.Vacancies and Newly Created Directorships: If any
vacancies occur in the Board of Directors by reason of resignation, removal or
otherwise, or if the authorized number of Directors is increased, the
Directors then in office shall continue to act, and such vacancies (if not
previously filled by the shareholders) may be filled by a majority of the
Directors then in office, whether or not sufficient to constitute a quorum,
provided that, immediately after filling such vacancy, at least two-thirds of
the Directors then holding office shall have been elected to such office by
the shareholders of the Corporation. In the event that at any time, other
than the time preceding the first meeting of shareholders, less than a
majority of the Directors of the Corporation holding office at that time were
so elected by the shareholders, a meeting of the shareholders shall be held
promptly and in any event within sixty (60) days for the purpose of electing
Directors to fill any existing vacancies in the Board of Directors unless the
Securities and Exchange Commission shall by order extend such period. Except
as provided in Section 3.04 hereof, a Director elected by the Board of
Directors to fill a vacancy shall be elected to hold office until the next
annual meeting of shareholders or until his successor is elected and
qualifies. [MGCL, Section 2-407; Investment Company Act, Section 16(a)]
Section 3.06.General Powers:
(a) The property, business, and affairs of the Corporation shall be
managed under the direction of the Board of Directors which may exercise all
the powers of the Corporation except such as are by law, by the Articles of
Incorporation, or by these By-Laws conferred upon or reserved to the
shareholders of the Corporation. [MGCL, Section 2-401]
(b) All acts done by any meeting of the Directors or by any person
acting as a Director, so long as his successor shall not have been duly
elected or appointed, shall, notwithstanding that it be afterwards discovered
that there was some defect in the election of the Directors or such person
acting as a Director or that they or any of them were disqualified, be as
valid as if the Directors or such person, as the case may be, had been duly
elected and were or was qualified to be Directors or a Director of the
Corporation.
Section 3.07.Power to Issue and Sell Stock: The Board of Directors may
from time to time authorize by resolution the issuance and sale of any of the
Corporation's authorized shares to such persons as the Board of Directors
shall deem advisable and such resolution shall set the minimum price or value
PAGE 10
of consideration for the stock or a formula for its determination, and shall
include a fair description of any consideration other than money and a
statement of the actual value of such consideration as determined by the Board
of Directors or a statement that the Board of Directors has determined that
the actual value is or will be not less than a certain sum. [MGCL, Section 2-
203]
Section 3.08.Power to Declare Dividends:
(a) The Board of Directors, from time to time as it may deem
advisable, may declare and the Corporation pay dividends, in cash, property,
or shares of the Corporation available for dividends out of any source
available for dividends, to the shareholders according to their respective
rights and interests. [MGCL, Section 2-309]
(b) The Board of Directors shall cause to be accompanied by a written
statement any dividend payment wholly or partly from any source other than the
Corporation's accumulated undistributed net income (determined in accordance
with good accounting practice and the rules and regulations of the Securities
and Exchange Commission then in effect) not including profits or losses
realized upon the sale of securities or other properties. Such statement
shall adequately disclose the source or sources of such payment and the basis
of calculation and shall be otherwise in such form as the Securities and
Exchange Commission may prescribe. [Investment Company Act, Section 19; SEC
Rule 19a-1; MGCL, Section 2-309(c)]
(c) Notwithstanding the above provisions of this Section 3.08, the
Board of Directors may at any time declare and distribute pro rata among the
shareholders a stock dividend out of the Corporation's authorized but unissued
shares of stock, including any shares previously purchased by the Corporation,
provided that such dividend shall not be distributed in shares of any class
with respect to any shares of a different class. The shares so distributed
shall be issued at the par value thereof, and there shall be transferred to
stated capital, at the time such dividend is paid, an amount of surplus equal
to the aggregate par value of the shares issued as a dividend and there may be
transferred from earned surplus to capital surplus such additional amount as
the Board of Directors may determine. [MGCL, Section 2-309]
Section 3.09.Annual and Regular Meetings: The annual meeting of the
Board of Directors for choosing officers and transacting other proper business
shall be held after the annual shareholders' meeting at such time and place as
may be specified in the notice of such meeting of the Board of Directors or,
in the absence of such annual shareholders' meeting, at such time and place as
the Board of Directors may provide. The Board of Directors from time to time
may provide by resolution for the holding of regular meetings and fix their
time and place (within or outside the State of Maryland). [MGCL, Section 2-
409(a)]
Section 3.10.Special Meetings: Special meetings of the Board of
Directors shall be held whenever called by the Chairman of the Board, the
President (or, in the absence or disability of the President, by any Vice
President), the Treasurer, or two or more Directors, at the time and place
(within or outside the State of Maryland) specified in the respective notices
or waivers of notice of such meetings.
Section 3.11.Notice: Notice of annual, regular, and special meetings
shall be in writing, stating the time and place, and shall be mailed to each
Director at his residence or regular place of business or caused to be
delivered to him personally or to be transmitted to him by telegraph, cable,
PAGE 11
or wireless at least two (2) days before the day on which the meeting is to be
held. Except as otherwise required by the By-Laws or the Investment Company
Act, such notice need not include a statement of the business to be transacted
at, or the purpose of, the meeting. [MGCL, Section 2-409(b)]
Section 3.12.Waiver of Notice: No notice of any meeting need be given
to any Director who is present at the meeting or to any Director who signs a
waiver of the notice of the meeting (which waiver shall be filed with the
records of the meeting), whether before or after the meeting. [MGCL, Section
2-409(c)]
Section 3.13.Quorum and Voting: At all meetings of the Board of
Directors the presence of one-third of the total number of Directors
authorized, but not less than two (2) Directors if there are at least two
directors, shall constitute a quorum. In the absence of a quorum, a majority
of the Directors present may adjourn the meeting, from time to time, until a
quorum shall be present. The action of a majority of the Directors present at
a meeting at which a quorum is present shall be the action of the Board of
Directors unless the concurrence of a greater proportion is required for such
action by law, by the Articles of Incorporation or by these By-Laws. [MGCL,
Section 2-408]
Section 3.14.Conference Telephone: Members of the Board of Directors or
of any committee designated by the Board, may participate in a meeting of the
Board or of such committee by means of a conference telephone or similar
communications equipment if all persons participating in the meeting can hear
each other at the same time, and participation by such means shall constitute
presence in person at such meeting. [MGCL, Section 2-409(d)]
Section 3.15.Compensation: Each Director may receive such remuneration
for his services as shall be fixed from time to time by resolution of the
Board of Directors.
Section 3.16.Action Without a Meeting: Except as otherwise provided
under the Investment Company Act, any action required or permitted to be taken
at any meeting of the Board of Directors or any committee thereof may be taken
without a meeting if a unanimous written consent which sets forth the action
is signed by all members of the Board or of such committee and such written
consent is filed with the minutes of proceedings of the Board or committee.
[MGCL, Section 2-408(c)]
Section 3.17.Director Emeritus: Upon the retirement of a Director of
the Corporation, the Board of Directors may designate such retired Director as
a Director Emeritus. The position of Director Emeritus shall be honorary only
and shall not confer upon such Director Emeritus any responsibility, or voting
authority, whatsoever with respect to the Corporation. A Director Emeritus
may, but shall not be required to, attend the meetings of the Board of
Directors and receive materials normally provided Directors relating to the
Corporation. The Board of Directors may establish such compensation as it may
deem appropriate under the circumstances to be paid by the Corporation to a
Director Emeritus.
<PAGE>
PAGE 12
ARTICLE IV
EXECUTIVE COMMITTEE AND OTHER COMMITTEES
Section 4.01.How Constituted: By resolution adopted by the Board of
Directors, the Board may appoint from among its members one or more
committees, including an Executive Committee, each consisting of at least two
(2) Directors. Each member of a committee shall hold office during the
pleasure of the Board. [MGCL, Section 2-411]
Section 4.02.Powers of the Executive Committee: Unless otherwise
provided by resolution of the Board of Directors, the Executive Committee, in
the intervals between meetings of the Board of Directors, shall have and may
exercise all of the powers of the Board of Directors to manage the business
and affairs of the Corporation except the power to:
(a) Declare dividends or distributions on stock;
(b) Issue stock other than as provided in Section 2-411(b) of
Corporations and Associations Article of the Annotated Code of
Maryland;
(c) Recommend to the shareholders any action which requires
shareholder approval;
(d) Amend the By-Laws; or
(e) Approve any merger or share exchange which does not require
shareholder approval.
[MGCL, Section 2-411(a)]
Section 4.03.Other Committees of the Board of Directors: To the extent
provided by resolution of the Board, other committees shall have and may
exercise any of the powers that may lawfully be granted to the Executive
Committee. [MGCL, Section 2-411(a)]
Section 4.04.Proceedings, Quorum, and Manner of Acting: In the absence
of appropriate resolution of the Board of Directors, each committee may adopt
such rules and regulations governing its proceedings, quorum and manner of
acting as it shall deem proper and desirable, provided that the quorum shall
not be less than two (2) Directors. In the absence of any member of any such
committee, the members thereof present at any meeting, whether or not they
constitute a quorum, may appoint a member of the Board of Directors to act in
the place of such absent member. [MGCL, Section 2-411(c)]
Section 4.05.Other Committees: The Board of Directors may appoint other
committees, each consisting of one or more persons who need not be Directors.
Each such committee shall have such powers and perform such duties as may be
assigned to it from time to time by the Board of Directors, but shall not
exercise any power which may lawfully be exercised only by the Board of
Directors or a committee thereof.
<PAGE>
PAGE 13
ARTICLE V
OFFICERS
Section 5.01.General: The officers of the Corporation shall be a
President, one or more Vice Presidents (one or more of whom may be designated
Executive Vice President), a Secretary, and a Treasurer, and may include one
or more Assistant Vice Presidents, one or more Assistant Secretaries, one or
more Assistant Treasurers, and such other officers as may be appointed in
accordance with the provisions of Section 5.11 hereof. The Board of Directors
may elect, but shall not be required to elect, a Chairman of the Board.
[MGCL, Section 2-412]
Section 5.02.Election, Term of Office and Qualifications: The officers
of the Corporation (except those appointed pursuant to Section 5.11 hereof)
shall be elected by the Board of Directors at its first meeting and thereafter
at each annual meeting of the Board. If any officer or officers are not
elected at any such meeting, such officer or officers may be elected at any
subsequent regular or special meeting of the Board. Except as provided in
Sections 5.03, 5.04, and 5.05 hereof, each officer elected by the Board of
Directors shall hold office until the next annual meeting of the Board of
Directors and until his successor shall have been chosen and qualified. Any
person may hold two or more offices of the Corporation, except that neither
the Chairman of the Board, nor the President, may hold the office of Vice
President, but no person shall execute, acknowledge, or verify any instrument
in more than one capacity if such instrument is required by law, the Articles
of Incorporation, or these By-Laws to be executed, acknowledged, or verified
by two or more officers. The Chairman of the Board shall be selected from
among the Directors of the Corporation and may hold such office only so long
as he continues to be a Director. No other officer need be a Director.
[MGCL, Sections 2-412, 2-413 and 2-415]
Section 5.03.Resignation: Any officer may resign his office at any time
by delivering a written resignation to the Board of Directors, the President,
the Secretary, or any Assistant Secretary. Unless otherwise specified
therein, such resignation shall take effect upon delivery.
Section 5.04.Removal: Any officer may be removed from office by the
Board of Directors whenever in the judgment of the Board of Directors the best
interests of the Corporation will be served thereby. [MGCL, Section 2-413(c)]
Section 5.05Vacancies and Newly Created Offices: If any vacancy shall
occur in any office by reason of death, resignation, removal, disqualification
or other cause, or if any new office shall be created, such vacancies or newly
created offices may be filled by the Board of Directors at any meeting or, in
the case of any office created pursuant to Section 5.11 hereof, by any officer
upon whom such power shall have been conferred by the Board of Directors.
[MGCL, Section 2-413(d)]
Section 5.06.Chairman of the Board: Unless otherwise provided by
resolution of the Board of Directors, the Chairman of the Board, if there be
such an officer, shall be the chief executive and operating officer of the
Corporation, shall preside at all shareholders' meetings, and at all meetings
of the Board of Directors. He shall be ex officio a member of all standing
committees of the Board of Directors. Subject to the supervision of the Board
of Directors, he shall have general charge of the business, affairs, property,
and operation of the Corporation and its officers, employees, and agents. He
may sign (unless the President or a Vice President shall have signed)
PAGE 14
certificates representing stock of the Corporation authorized for issuance by
the Board of Directors and shall have such other powers and perform such other
duties as may be assigned to him from time to time by the Board of Directors.
Section 5.07.President: Unless otherwise provided by resolution of the
Board of Directors, the President shall, at the request of or in the absence
or disability of the Chairman of the Board, or if no Chairman of the Board has
been chosen, he shall preside at all shareholders' meetings and at all
meetings of the Board of Directors and shall in general exercise the powers
and perform the duties of the Chairman of the Board. He may sign (unless the
Chairman or a Vice President shall have signed) certificates representing
stock of the Corporation authorized for issuance by the Board of Directors.
Except as the Board of Directors may otherwise order, he may sign in the name
and on behalf of the Corporation all deeds, bonds, contracts, or agreements.
He shall exercise such other powers and perform such other duties as from time
to time may be assigned to him by the Board of Directors.
Section 5.08.Vice President: The Board of Directors shall, from time to
time, designate and elect one or more Vice Presidents (one or more of whom may
be designated Executive Vice President) who shall have such powers and perform
such duties as from time to time may be assigned to them by the Board of
Directors or the President. At the request or in the absence or disability of
the President, the Vice President (or, if there are two or more Vice
Presidents, the Vice President in order of seniority of tenure in such office
or in such other order as the Board of Directors may determine) may perform
all the duties of the President and, when so acting, shall have all the powers
of and be subject to all the restrictions upon the President. Any Vice
President may sign (unless the Chairman, the President, or another Vice
President shall have signed) certificates representing stock of the
Corporation authorized for issuance by the Board of Directors.
Section 5.09.Treasurer and Assistant Treasurers: The Treasurer shall be
the principal financial and accounting officer of the Corporation and shall
have general charge of the finances and books of account of the Corporation.
Except as otherwise provided by the Board of Directors, he shall have general
supervision of the funds and property of the Corporation and of the
performance by the custodian of its duties with respect thereto. He may
countersign (unless an Assistant Treasurer or Secretary or Assistant Secretary
shall have countersigned) certificates representing stock of the Corporation
authorized for issuance by the Board of Directors. He shall render to the
Board of Directors, whenever directed by the Board, an account of the
financial condition of the Corporation and of all his transactions as
Treasurer; and as soon as possible after the close of each fiscal year he
shall make and submit to the Board of Directors a like report for such fiscal
year. He shall cause to be prepared annually a full and correct statement of
the affairs of the Corporation, including a balance sheet and a financial
statement of operations for the preceding fiscal year, which shall be
submitted at the annual meeting of shareholders and filed within twenty (20)
days thereafter at the principal office of the Corporation. He shall perform
all the acts incidental to the office of the Treasurer, subject to the control
of the Board of Directors. Any Assistant Treasurer may perform such duties of
the Treasurer as the Treasurer or the Board of Directors may assign, and, in
the absence of the Treasurer, he may perform all the duties of the Treasurer.
Section 5.10.Secretary and Assistant Secretaries: The Secretary shall
attend to the giving and serving of all notices of the Corporation and shall
record all proceedings of the meetings of the shareholders and Directors in
one or more books to be kept for that purpose. He shall keep in safe custody
the seal of the Corporation and shall have charge of the records of the
Corporation, including the stock books and such other books and papers as the
PAGE 15
Board of Directors may direct and such books, reports, certificates and other
documents required by law to be kept, all of which shall at all reasonable
times be open to inspection by any Director. He shall countersign (unless the
Treasurer, an Assistant Treasurer or an Assistant Secretary shall have
countersigned) certificates representing stock of the Corporation authorized
for issuance by the Board of Directors. He shall perform such other duties as
appertain to his office or as may be required by the Board of Directors. Any
Assistant Secretary may perform such duties of the Secretary as the Secretary
or the Board of Directors may assign, and, in the absence of the Secretary, he
may perform all the duties of the Secretary.
Section 5.11.Subordinate Officers: The Board of Directors from time to
time may appoint such other officers or agents as it may deem advisable, each
of whom shall have such title, hold office for such period, have such
authority and perform such duties as the Board of Directors may determine.
The Board of Directors from time to time may delegate to one or more officers
or agents the power to appoint any such subordinate officers or agents and to
prescribe their respective rights, terms of office, authorities, and duties.
Any officer or agent appointed in accordance with the provisions of this
Section 5.11 may be removed, either with or without cause, by any officer upon
whom such power of removal shall have been conferred by the Board of
Directors. [MGCL, Section 2-412(b)]
Section 5.12.Remuneration: The salaries or other compensation of the
officers of the Corporation shall be fixed from time to time by resolution of
the Board of Directors, except that the Board of Directors may by resolution
delegate to any person or group of persons the power to fix the salaries or
other compensation of any subordinate officers or agents appointed in
accordance with the provisions of Section 5.11 hereof.
Section 5.13.Surety Bond: The Board of Directors may require any
officer or agent of the Corporation to execute a bond (including, without
limitation, any bond required by the Investment Company Act and the rules and
regulations of the Securities and Exchange Commission promulgated thereunder)
to the Corporation in such sum and with such surety or sureties as the Board
of Directors may determine, conditioned upon the faithful performance of his
or her duties to the Corporation, including responsibility for negligence and
for the accounting for any of the Corporation's property, funds or securities
that may come into his or her hands.
ARTICLE VI
CUSTODY OF SECURITIES AND CASH
Section 6.01.Employment of a Custodian: The Corporation shall place and
at all times maintain in the custody of a Custodian (including any sub-
custodian for the Custodian) all funds, securities, and similar investments
owned by the Corporation. The Custodian shall be a bank having an aggregate
capital, surplus, and undivided profits of not less than $10,000,000. Subject
to such rules, regulations, and orders as the Securities and Exchange
Commission may adopt as necessary or appropriate for the protection of
investors, the Corporation's Custodian may deposit all or a part of the
securities owned by the Corporation in a sub-custodian or sub-custodians
situated within or without the United States. The Custodian shall be
appointed and its remuneration fixed by the Board of Directors. [Investment
Company Act, Section 17(f)]
PAGE 16
Section 6.02.Central Certificate Service: Subject to such rules,
regulations, and orders as the Securities and Exchange Commission may adopt as
necessary or appropriate for the protection of investors, the Corporation's
Custodian may deposit all or any part of the securities owned by the
Corporation in a system for the central handling of securities established by
a national securities exchange or national securities association registered
with the Commission under the Securities Exchange Act of 1934, or such other
person as may be permitted by the Commission, pursuant to which system all
securities of any particular class or series of any issuer deposited within
the system are treated as fungible and may be transferred or pledged by
bookkeeping entry without physical delivery of such securities. [Investment
Company Act, Section 17(f)]
Section 6.03.Cash Assets: The cash proceeds from the sale of securities
and similar investments and other cash assets of the Corporation shall be kept
in the custody of a bank or banks appointed pursuant to Section 6.01 hereof,
or in accordance with such rules and regulations or orders as the Securities
and Exchange Commission may from time to time prescribe for the protection of
investors, except that the Corporation may maintain a checking account or
accounts in a bank or banks, each having an aggregate capital, surplus, and
undivided profits of not less than $10,000,000, provided that the balance of
such account or the aggregate balances of such accounts shall at no time
exceed the amount of the fidelity bond, maintained pursuant to the
requirements of the Investment Company Act and rules and regulations
thereunder, covering the officers or employees authorized to draw on such
account or accounts. [Investment Company Act, Section 17(f)]
Section 6.04.Free Cash Accounts: The Corporation may, upon resolution
of its Board of Directors, maintain a petty cash account free of the foregoing
requirements of this Article VI in an amount not to exceed $500, provided that
such account is operated under the imprest system and is maintained subject to
adequate controls approved by the Board of Directors over disbursements and
reimbursements including, but not limited to, fidelity bond coverage for
persons having access to such funds. [Investment Company Act, Rule 17f-3]
Section 6.05.Action Upon Termination of Custodian Agreement: Upon
resignation of a custodian of the Corporation or inability of a custodian to
continue to serve, the Board of Directors shall promptly appoint a successor
custodian, but in the event that no successor custodian can be found who has
the required qualifications and is willing to serve, the Board of Directors
shall call as promptly as possible a special meeting of the shareholders to
determine whether the Corporation shall function without a custodian or shall
be liquidated. If so directed by vote of the holders of a majority of the
outstanding shares of stock of the Corporation, the custodian shall deliver
and pay over all property of the Corporation held by it as specified in such
vote.
Section 6.06.Other Arrangements: The Corporation may make such other
arrangements for the custody of its assets (including deposit arrangements) as
may be required by any applicable law, rule or regulation.
ARTICLE VII
EXECUTION OF INSTRUMENTS, VOTING OF SECURITIES
Section 7.01.Execution of Instruments: All deeds, documents, transfers,
contracts, agreements, requisitions or orders, promissory notes, assignments,
PAGE 17
endorsements, checks and drafts for the payment of money by the Corporation,
and other instruments requiring execution by the Corporation shall be signed
by the Chairman, the President, a Vice President, or the Treasurer, or as the
Board of Directors may otherwise, from time to time, authorize. Any such
authorization may be general or confined to specific instances.
Section 7.02.Voting of Securities: Unless otherwise ordered by the
Board of Directors, the Chairman, the President, or any Vice President shall
have full power and authority on behalf of the Corporation to attend and to
act and to vote, or in the name of the Corporation to execute proxies to vote,
at any meeting of shareholders of any company in which the Corporation may
hold stock. At any such meeting such officer shall possess and may exercise
(in person or by proxy) any and all rights, powers, and privileges incident to
the ownership of such stock. The Board of Directors may by resolution from
time to time confer like powers upon any other person or persons. [MGCL,
Section 2-509]
ARTICLE VIII
CAPITAL STOCK
Section 8.01.Ownership of Shares:
(a) Certificates certifying the ownership of shares will not be issued
for shares purchased or otherwise acquired. The ownership of shares, full or
fractional, shall be recorded on the books of the Corporation or its agent.
The record books of the Corporation as kept by the Corporation or its agent,
as the case may be, shall be conclusive as to the number of shares held from
time to time by each such shareholder.
Section 8.02.Transfer of Capital Stock:
(a) Shares of stock of the Corporation shall be transferable only upon
the books of the Corporation kept for such purpose.
(b) The Corporation shall be entitled to treat the holder of record of
any share of stock as the absolute owner thereof for all purposes, and
accordingly shall not be bound to recognize any legal, equitable, or other
claim or interest in such share on the part of any other person, whether or
not it shall have express or other notice thereof, except as otherwise
expressly provided by the statutes of the State of Maryland.
Section 8.03.Transfer Agents and Registrars: The Board of Directors
may, from time to time, appoint or remove transfer agents and registrars of
transfers of shares of stock of the Corporation, and it may appoint the same
person as both transfer agent and registrar.
Section 8.04.Transfer Regulations: The shares of stock of the
Corporation may be freely transferred, and the Board of Directors may, from
time to time, adopt lawful rules and regulations with reference to the method
of transfer of the shares of stock of the Corporation.
Section 8.05.Fixing of Record Date: The Board of Directors may fix in
advance a date as a record date for the determination of the shareholders
entitled to notice of or to vote at any meeting of shareholders or any
adjournment thereof, or to express consent to corporate action in writing
PAGE 18
without a meeting, or to receive payment of any dividend or other distribution
or allotment of any rights, or to exercise any rights in respect of any
change, conversion, or exchange of stock, or for any other proper purpose,
provided that such record date shall be a date not more than sixty (60) days
nor, in the case of a meeting of shareholders, less than ten (10) days prior
to the date on which the particular action, requiring such determination of
shareholders, is to be taken. In such case, only such shareholders as shall
be shareholders of record on the record date so fixed shall be entitled to
such notice of, and to vote at, such meeting or adjournment, or to give such
consent, or to receive payment of such dividend or other distribution, or to
receive such allotment of rights, or to exercise such rights, or to take other
action, as the case may be, notwithstanding any transfer of any shares on the
books of the Corporation after any such record date. A meeting of
shareholders convened on the date for which it was called may be adjourned
from time to time without notice to a date not more than one hundred twenty
(120) days after the original record date. [MGCL, Section 2-511]
ARTICLE IX
FISCAL YEAR, ACCOUNTANT
Section 9.01.Fiscal Year: The fiscal year of the Corporation shall be
the twelve (12) calendar months beginning on the 1st day of November in each
year and ending on the last day of the following October, or such other period
of twelve (12) calendar months as the Board of Directors may by resolution
prescribe.
Section 9.02.Accountant:
(a) The Corporation shall employ an independent public accountant or
firm of independent public accountants for each series of the Corporation to
examine the accounts of the Corporation with respect to such series and to
sign and certify financial statements filed by the Corporation with respect to
such series. The certificates and reports of the accountant(s) shall be
addressed both to the Board of Directors and to the shareholders. The
Corporation may employ a different accountant with respect to each series.
(b) A majority of the members of the Board of Directors who are not
interested persons (as such term is defined in the Investment Company Act) of
the Corporation shall select the accountant for each series, by vote cast in
person, at any meeting held within such period of time as may be allowed under
the Investment Company Act. Such selection shall be submitted for
ratification or rejection at the next succeeding annual shareholders' meeting
for such series. If such meeting shall reject such selection, the accountant
for such series shall be selected by majority vote of the Corporation's
outstanding voting securities of such series, either at the meeting at which
the rejection occurred or at a subsequent meeting of shareholders for such
series called for the purpose.
(c) Any vacancy occurring between annual meetings, due to the death or
resignation of the accountant of a series, may be filled by the vote of a
majority of those members of the Board of Directors who are not interested
persons (as so defined) of the Corporation, cast in person at a meeting called
for the purpose of voting on such action.
(d) The employment of the accountant of a series shall be conditioned
upon the right of such series of the Corporation by vote of a majority of the
PAGE 19
outstanding voting securities of such series at any meeting called for the
purpose to terminate such employment forthwith without any penalty.
[Investment Company Act, Section 32(a)]
ARTICLE X
INDEMNIFICATION AND INSURANCE
Section 10.01.Indemnification and Payment of Expenses in Advance: The
Corporation shall indemnify any individual ("Indemnitee") who is a present or
former director, officer, employee, or agent of the Corporation, or who is or
has been serving at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, who, by reason of his position was, is, or is threatened to
be made a party to any threatened, pending, or completed action, suit, or
proceeding, whether civil, criminal, administrative, or investigative
(hereinafter collectively referred to as a "Proceeding") against any
judgments, penalties, fines, settlements, and reasonable expenses (including
attorneys' fees) incurred by such Indemnitee in connection with any
Proceeding, to the fullest extent that such indemnification may be lawful
under Maryland law. The Corporation shall pay any reasonable expenses so
incurred by such Indemnitee in defending a Proceeding in advance of the final
disposition thereof to the fullest extent that such advance payment may be
lawful under Maryland law. Subject to any applicable limitations and
requirements set forth in the Corporation's Articles of Incorporation and in
these By-Laws, any payment of indemnification or advance of expenses shall be
made in accordance with the procedures set forth in Maryland law.
Notwithstanding the foregoing, nothing herein shall protect or purport
to protect any Indemnitee against any liability to which he would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of his office
("Disabling Conduct").
Anything in this Article X to the contrary notwithstanding, no
indemnification shall be made by the Corporation to any Indemnitee unless:
(a) there is a final decision on the merits by a court or other body
before whom the Proceeding was brought that the Indemnitee was not
liable by reason of Disabling Conduct; or
(b) in the absence of such a decision, there is a reasonable
determination, based upon a review of the facts, that the
Indemnitee was not liable by reason of Disabling Conduct, which
determination shall be made by:
(i) the vote of a majority of a quorum of directors who are
neither "interested persons" of the Corporation as defined in
Section 2(a)(19) of the Investment Company Act, nor parties to
the Proceeding; or
(ii) an independent legal counsel in a written opinion.
Anything in this Article X to the contrary notwithstanding, any advance
of expenses by the Corporation to any Indemnitee shall be made only upon the
undertaking by such Indemnitee to repay the advance unless it is ultimately
PAGE 20
determined that such Indemnitee is entitled to indemnification as above
provided, and only if one of the following conditions is met:
(a) the Indemnitee provides a security for his undertaking; or
(b) the Corporation shall be insured against losses arising by reason
of any lawful advances; or
(c) there is a determination, based on a review of readily available
facts, that there is reason to believe that the Indemnitee will
ultimately be found entitled to indemnification, which
determination shall be made by:
(i) a majority of a quorum of directors who are neither
"interested persons" of the Corporation as defined in Section
2(a)(19) of the Investment Company Act, nor parties to the
Proceeding; or
(ii) an independent legal counsel in a written opinion.
Section 10.02. Insurance of Officers, Directors, Employees and Agents:
To the fullest extent permitted by applicable Maryland law and by Section
17(h) of the Investment Company Act, as from time to time amended, the
Corporation may purchase and maintain insurance on behalf of any person who is
or was a director, officer, employee, or agent of the Corporation, or who is
or was serving at the request of the Corporation as a director, officer,
employee, or agent of another corporation, partnership, joint venture, trust,
or other enterprise, against any liability asserted against him and incurred
by him in or arising out of his position, whether or not the Corporation would
have the power to indemnify him against such liability. [MGCL, Section 2-
418(k)]
Section 10.03.Amendment: No amendment, alteration or repeal of this
Article or the adoption, alteration or amendment of any other provision of the
Articles of Incorporation or By-Laws inconsistent with this Article shall
adversely affect any right or protection of any person under this Article with
respect to any act or failure to act which occurred prior to such amendment,
alteration, repeal or adoption.
ARTICLE XI
AMENDMENTS
Section 11.01.General: Except as provided in Section 11.02 hereof, all
By-Laws of the Corporation, whether adopted by the Board of Directors or the
shareholders, shall be subject to amendment, alteration, or repeal, and new
By-Laws may be made, by the affirmative vote of a majority of either:
(a) the holders of record of the outstanding shares of stock of the
Corporation entitled to vote, at any annual or special meeting the
notice or waiver of notice of which shall have specified or summarized
the proposed amendment, alteration, repeal, or new By-Law; or
(b) the Directors present at any regular or special meeting at
which a quorum is present if the notice or waiver of notice thereof or
material sent to the Directors in connection therewith on or prior to
the last date for the giving of such notice under these By-Laws shall
PAGE 21
have specified or summarized the proposed amendment, alteration, repeal,
or new By-Law.
Section 11.02.By Shareholders Only:
(a) No amendment of any section of these By-Laws shall be made except
by the shareholders of the Corporation if the shareholders shall have provided
in the By-Laws that such section may not be amended, altered, or repealed
except by the shareholders.
(b) From and after the issue of any shares of the Capital Stock of the
Corporation, no amendment of this Article XI shall be made except by the
shareholders of the Corporation.
ARTICLE XII
MISCELLANEOUS
Section 12.01. Use of the Term "Annual Meeting:" The use of the term
"annual meeting" in these By-Laws shall not be construed as implying a
requirement that a shareholder meeting be held annually.
March 18, 1994
T. Rowe Price Fixed Income Series, Inc.
100 East Pratt Street
Baltimore, Maryland 21202
Dear Sirs:
In connection with the proposed registration of an indefinite number of
shares of Capital Stock of your Company, I have examined certified copies of
your Company's Articles of Incorporation dated March 16, 1994, and the By-Laws
of your Company as presently in effect.
I am of the opinion that:
(i) your Company is a corporation duly organized and existing under the
laws of Maryland; and
(ii) each of such authorized shares of Capital Stock of your Company,
upon payment in full of the price fixed by the Board of Directors of
your Company, will be legally and validly issued and will be fully
paid and non-assessable.
I hereby consent to the use of this opinion as an exhibit to the
Company's Registration Statement on Form N-1A to be filed with the Securities
and Exchange Commission for the registration under the Securities Act of 1933
of an indefinite number of shares of Capital Stock of your Company.
Sincerely,
/s/Henry H. Hopkins
Henry H. Hopkins
